Topgolf Callaway Brands Corp.

Good day and welcome to the Topgolf Callaway Brand's second quarter 2024 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. And please note that this event is being recorded. I would now like to turn the conference over to Katina Mezodakis, 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 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 financial results. We have 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. Aside from revenue, the financial numbers reported and discussed on today's call are non-GAAP measures. We identified these non-GAAP measures in the presentation and reconciled 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 Chip Brewer.

Thank you, Katina. Good afternoon, everyone, and thank you for joining our call. I want to begin by reiterating the announcement we made in our press release about our formal strategic review of the Topgolf business. We remain convinced that Topgolf is a high-quality business with significant future opportunity. It is transforming the game of golf, and we believe it will deliver substantial growth and financial returns over time. At the same time, we have been disappointed in our stock performance for some time. as well as the more recent same venue sales performance. As a result, we are in the process of conducting a full strategic review of Topgolf. This review includes the assessment of organic strategies to return Topgolf to profitable same venue sales growth, as well as inorganic alternatives, including a potential spin of Topgolf. Our strategic review of Topgolf is being conducted with the help of outside advisors and is focused on maximizing long-term shareholder value. We're active in this work at present and expect to complete our strategic review of Topgolf expeditiously. We will report back on this when the work is complete. As you can imagine, I'm unable to provide further comments or details on any potential inorganic strategies at this time. I will try to address the organic growth initiatives during my comments and will be happy to answer questions on this portion. Moving on to a review of the second quarter. Total revenue of $1.158 billion was below our expectations primarily due to lower than expected same menu sales at Topgolf, which I'll discuss in greater detail in a few minutes. Both the golf equipment and the active lifestyle segments performed roughly consistent with expectations, including strong market share performance at both Travis Matthew and Callaway Golf Equipment. Total company Q2 EBITDA of $206 million was ahead of expectations, driven by continued strong operating efficiencies and cost management across the business. Given these results and current trends, We are lowering our full year revenue expectations by approximately 225 million to a range of 4.2 to 4.26 billion dollars and our full year same venue sales estimates to be down very high single to low double digits. As a result, we are revising our EBITDA outlook to 570 to 590 million dollars which implies an approximately flat year-over-year EBITDA margin. By segment, we're lowering our second half top golf revenue outlook based on our updated same venue sales estimates. This will negatively impact our EBITDA, but the flow through will be mitigated by continued improvement in our venue operating efficiencies, as well as cost savings initiatives. In the legacy or product side of our business, we are rising our second half revenues down by approximately 2% or 55 million. This reflects the potential for further slowing of consumer activity in the second half of this year. However, we believe we can manage expenses to offset the majority of any bottom line impact of this modest revenue adjustment in our products business. Finally, as Brian will discuss in a few minutes, our cash flow and financial position remains strong. I'll now move to segment performance starting with Topgolf. I'd like to start with what we're seeing from a macro perspective. As has been well documented, persistent inflation over the last few years has led to belt tightening across wide portions of consumer discretionary spending. We see it in internal and external survey data where price is the biggest concern of our customers. as well as those in both the leisure and restaurant industries. We hear it from our peers, see it in credit card data, and observe it firsthand in our venue business, including feedback from our large corporate clients. In support of this, during the quarter, we saw that our top-performing venues were positively correlated with the overall household income data. I'll now turn to our same venue sales results, including what we saw, what we're going to do about it, and our thoughts moving forward. What we're seeing, Topgolf same venue sales declined 8% in the quarter, driven by soft overall traffic trends. The year over year data shows both the one and two bay and the three plus bay down similarly in the quarter. But when you look at the two year stack and the 2019 data, it shows the consumer portion of our business remains stronger than our events business. The one to two-bay trends appear to be moving directionally with that of other similar entertainment experiences in restaurants. Turning to events in three-plus-bay, this is the slowest part of our business, but perhaps the easiest to understand. For the quarter, three-plus-bay same-venue sales was down 9% year-over-year, 27% on a two-year stack, and 5% versus 2019. We previously thought the events business was stabilizing, but it then deteriorated further in late May and June. We believe the events business results reflect a normalization from a post-COVID surge, as well as softness in demand typical of slowing economic conditions and corporate belt tightening. Based on sales lead data, we now expect this slowness to continue through Q3 with the potential level off by the end of the year. Looking at the most recent data, we saw our combined U.S. same-venue sales deteriorate in June as there was a step change in macro demand starting in late May. This was despite the rollout, or more likely partially mitigated by the rollout, of our free 30 promotion and advertising campaign, both of which had tested quite well in May. June's U.S. same-venue sales was down 8%. when we expected it to be slightly positive. July was down approximately 11% on a retail calendar basis, with the last two weeks of the month trending better than the first few weeks. With this as the backdrop, we're now forecasting our full year same venue sales to decline very high single digits to low double digits. This implies the trends we've been seeing in June and July continue for the balance of the year. Given the fact that August through mid-December should be a period of relatively easier comps, this forecast also allows for some additional slowing of overall demand. Now turning to what we're going to do about it. First of all, we're furthering our digital efforts as well as refining our select promotional offerings. As I've noted on the last several calls, we believe the biggest opportunity for us is building out Topgolf's digital business. In fact, our digital sales penetration increased again this quarter by another 50 basis points year over year to 35%. This is important, as we know that venues with higher digital sales penetration have consistently outperformed our fleet averages. And this is why a significant portion of our investments are focused on strengthening our digital capabilities, both from a technology perspective, such as implementing PI, our reservation system, and our consumer data platform, as well as from a talent and organizational perspective. To this end, the digital team is going to be investing further in additional performance marketing, loyalty program, and consumer insight expertise. Turning to promotions, to protect long-term profitability and brand value, any promotions that we offer need to be selective and targeted. With this in mind, we have analyzed our free 30 promotion and found it to be effective in driving traffic and interest from existing customers, smoothing out demand, and driving improved overall results. But it has been less effective in attracting new customers. Many new customers generally visit for the first time by walking in, and we believe they may be reluctant to book a two-hour reservation. Given these insights, we will be utilizing our consumer data platform and targeting new customers with a walk-in version of our free 30 promotion that is redeemable anytime, not only nine to five weekdays and not requiring a two-hour reservation, while continuing to drive our existing efforts via reservations for customers who value the reservations model we have built. We are trialing this now and look forward to seeing the results. Partnerships are another way to increase awareness and drive incremental traffic. As we have gained scale, we've been able to find bigger, more national partners. Our recently announced partnership with Visa is a good example of this. With this partnership, Topgolf is being promoted to Cash App Visa cardholders via special offers intended to drive both new and repeat visits. Lastly, but importantly, we're going to be stepping up our game on delivering newness, continually improving the quality of our experience and reasons to visit. We are a premium experience, and thus, by design, we are not made to be cheap. But we are unique, and we can provide more fun and less value than other offerings. By refocusing on newness, we believe we can give customers more reasons to give Topgolf a try or come back and visit us again. From this point forward, On a national basis, we will be delivering exciting and fun new reasons to visit at least three to four times per year. For Q3, this includes the recently launched Sure Thing Golf Club, which was designed by the Callaway engineers in consultation with the Topgolf team and is geared towards new golfers. It features a unique and innovative design that makes it easier to get the ball airborne and forward. Then, In Q4, we'll be launching our next new in-venue game, and if you're a fan of video games, we think you'll love it. In addition to these big national programs, there will also be more local initiatives to drive incremental visits and excitement, such as concerts and live DJ nights. Turning to my thoughts moving forward, overall, I firmly believe we are already doing a lot of the right things to drive growth in same-menu sales over time, including constantly improving our teams and initiatives. As evidence of this, I point to the fact that since launching our spring and summer initiatives, we have seen purchase intent, brand recommendation, and price perception scores improve. And perhaps most importantly, our fund scores are up. which we believe is a leading indicator for future growth and has historically been highly correlated to our consumers' likelihood to both return and recommend Topgolf. At the same time, we've also identified a few areas where we can do better, and we're putting in the plans and resources to quickly address these going forward. Although it is clear that some of these initiatives will take some time to implement, and the macro environment remains choppy, I continue to believe in Topgolf's ability to drive same venue sales growth over time. Shifting gears to our second key performance driver, margin expansion. Our team has consistently shown its ability to drive venue operating margins, both in positive and difficult market conditions. For the quarter, despite soft top line trends, we were able to expand total segment adjusted EBITDA margin by 260 basis points year-over-year. That said, given our lowered revenue outlook for the back half of the year, we now expect full-year venue EBITDA margins to be roughly flat versus last year at approximately 34%, which is still quite healthy considering our lower revenue expectations and is a full 100 basis points ahead of our 2022 margin, with plenty of room to grow as top line improves. Moving to new venue openings, we remain on track to add seven venues this year. We added Bryan, Texas in Q1, successfully opened Durham and Montebello in Q2, and the four remaining 2024 venues are under construction and on schedule. Venues continue to open well and are achieving our high financial targets. In conclusion on the Topgolf segment report out, Topgolf is performing well in two of its three key performance drivers, including venue margins and new venue development. On the same venue sales front, results have been below our expectations and we are committed to improving here. However, I believe that the vast majority of what we are seeing is an economic cycle and or a post-COVID normalization in the events portion of our business. Importantly, we are continuing to strengthen our capabilities and expertise to drive positive same venue sales in a normalized environment. I believe that the enduring strength of Topgolf remains intact, this being that consumers really enjoy the experience. In addition, the sport of golf remains on trend, as does Topgolf. And Topgolf retains a strong economic model, a model where the core profitability of our venues as measured on a normalized revenue level, is increasing over time. This combines well with an outstanding growth outlook as we can identify and build new venues with high confidence and unmatched execution and the business benefits from a uniquely strong defensive moat. Turning now to golf equipment. The Callaway brand remains strong with growing market share positions. This quarter, Callaway held its position as the number one U.S. market share brand in driver, fairy woods, and hybrids. Our AI Smoke line maintained the number one U.S. model market share position in driver, fairy woods, and irons. And Odyssey also maintained its position as the number one putter brand. One stat that I'm particularly proud of is our June greengrass woods market share of 38%. 38% is a terrific number. It showcases the outstanding performance of our AI smoke woods in a fitting environment. And the fact that we can deliver this at Greengrass also showcases our scale and strength and distribution in this important channel. Turning to golf ball, the significant and strategic investments we've made in golf ball over the last several years continue to pay dividends for the Callaway brand. A major focus for Callaway this year was to grow in our tour ball segment with our new Chrome Tour product line. Our results show that we're doing just that. As you may recall, last quarter I announced we would be hosting Chrome Tour ball speed and spin challenges. We have now done hundreds of these, and the results have been impressive. Our test data shows that we are faster in 86% of the tests, and that we deliver an advantage in pitch, shot, backspin, and 66% of the test. Our overall June U.S. ball market share increased by 120 basis points year over year to 21.9%, and our premium ball share achieved a new record market share of 12%, up 150 basis points year over year. Our brand has also had an outstanding year on tour, with Yuka Sasso winning her second U.S. Women's Open and Xander winning both his first and his second major championships, the PGA Championship and then the Open Championship. Looking at global markets, the core golf markets of the U.S., Japan, and Europe all remain healthy, with field inventories, consumer demand, and overall market conditions steady, if not slightly positive. In each of these markets, we believe we are slightly outperforming the overall market as measured by revenues and market share. The Korean market, on the other hand, remains soft, down double digits this year, and unfortunately, we have also underperformed in this market. As a result, we have recently made changes aimed at improving our relative performance here, and we are seeing positive signs. For the balance of the year, We're excited about our recent upcoming product launches. We just launched our new Opus wedge, and they are already a popular choice on tour. In my opinion, this is the best wedge we've launched in my time here at Callaway. Congrats and well done to the teams that drove this. And looking only slightly forward, on next Monday, we will be announcing the launch of our new Apex line of irons. This is our most premium line of irons, and the product is both beautiful and innovative. I'm particularly excited about the new TIE fusion technology that will be introduced as part of this exciting new lineup, and I invite you to tune into our launch communication to learn more. Looking at our full-year forecast for this segment, we now see revenues being approximately flat for the full year, but up slightly on a currency-neutral basis. Switching gears to our active lifestyle segment, Q2 revenues were in line with expectations. Travis Matthew had a solid quarter, delivering share gains at wholesale and also opening five new retail stores. They are on track to open 10 stores for the full year for a total of 57. The women's initiative also continues to develop nicely. It is now approaching 10% of revenues. It appears to be on its way to being a significant portion of this business. In addition, the Travis Matthew team has done a great job growing their outerwear business, which in turn is helping them be a less seasonally focused brand. Moving to Jack Wolfskin, I'd like to commend the team for their hard work as we took significant steps to right-size the business since we last spoke on our Q1 earnings call. The brand has successfully shifted its strategic focus back to its core markets in Central Europe and China. We are encouraged by recent results, including achieving our sales targets for Q2, and we still expect a positive EBITDA performance in 2024. Consistent with last quarter's communication, we expect revenues in this segment to decline year over year as we form a new base from which to resume growth. In conclusion, we are pleased with the overall performance of both our golf equipment and active lifestyle segments. At Topgolf, we are working through what we view as a short-term cycle of volatility in our same-menu sales while, at the same time, significantly improving our organization's ability to drive positive results in a normalized environment. We continue to demonstrate our ability to drive improved operating efficiency within our venues. to reliably deliver strong performance in newly opened venues with highly attractive financial returns, to grow our digital acumen and penetration, and to build on the overall strength of the consumer experience, an experience which continues to resonate with Topgolf players as one of the most fun entertainment options available. As we look forward, we remain confident that we have the proper strategy in place to drive long-term growth in both revenue and profitability. With that, I'll turn the call over to Brian.