Topgolf Callaway Brands Corp.

Good day and welcome to the Topgolf Callaway brand third 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 presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Katina Metadakis. Please go ahead, ma'am.

Thank you, operator, and good afternoon, everyone. Welcome to Topgolf Callaway Brand's third quarter earnings conference call. I'm Katina Metadakis, 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 financial results. We have 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. Aside from revenue, the financial numbers reported and discussed on today's call are all 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, and good afternoon, everyone. Thank you for joining our call today. I'm pleased to report Q3 results, which came in ahead of our guidance in both our legacy and Topgolf businesses. Focusing first on revenue, Topgolf's same-venue sales came in roughly consistent with our expectations, and in our legacy business, we benefited from product shipment timing moving into the quarter from Q4. Moving to EBITDA, the quarter's outperformance was driven by both venue operating efficiencies and cost management at Topgolf, as well as the shipment timing in our legacy business. We also had slightly favorable FX for the quarter relative to our last guide, but this subsequently shifted against us again in early Q4 and remains a headwind on a full year, year-over-year basis. In the golf equipment segment, we continue to lead, with 2024 trending to be the third consecutive year that Callaway has earned the number one U.S. market share position in golf clubs, as well as the ninth out of the last 10 years in this number one position. In the ball business, our investments in the category, along with this year's launch of our new Chrome Tour brand, have driven steadily improving performance and record market shares. In active lifestyle, Travis Matthew continues to grow share of wallets through discipline category expansion and distribution. On the other hand, in the golf equipment segment and at Travis Matthew, we saw slightly slower market conditions than expected in Q3. As a result, we are lowering our full-year revenue guidance by approximately $30 million to reflect the lower sell-through in that period. a reduction that has spread relatively evenly across the non-Topgolf portion of our business. However, we view this as short-term volatility rather than a new trend. As consumer activity has since picked back up, our brand positions remain strong, and we remain confident in the long-term outlook for our core markets and product categories. Shifting gears to segment performance, starting with Topgolf, Starting with same venue sales, the business performed roughly consistent with expectations in Q3 at down 11%. One to two bay was down approximately 9%, and three plus bay was approximately down 19%. The one to two bay performance was balanced fairly evenly between traffic and spend for the quarter. For the full year, we're holding our previous guidance for same venue sales to be down very high single digits to low double digits. Early October results were partially impacted by severe weather, but recovered nicely during the month, with the full month performing consistent with our implied Q4 same venue sales forecast of down 10% to 15%. Additionally, November and December bookings for 3 Plus Bay events indicate the potential for some improvement relative to recent 3-plus bay trends. Given all this, if things break our way, we could end up towards the good end of our full-year guide. However, given the volatility we've seen and the potential for adverse weather this time of year, we're holding our previous guide. Looking forward on same-menu sales, The team continues to work on key initiatives to return the business to same-venue sales growth. This includes a new game that the team is very excited about, Sonic the Hedgehog, which will launch mid-this month and coincides with a new movie coming out in December. Exciting new reasons to visit and enhanced consumer experiences such as this are a key part of how we intend to drive long-term traffic growth and thus we are ramping up our ability to deliver these both more frequently and more effectively. Beyond this, we're full speed ahead on leveraging our new consumer data platform to provide more targeted promotions and offers to lapsed or new visitors. We're also launching new passes and bundles aimed at more frequent visitors. We're expanding our partnership programs, and we're further strengthening the team with experts in performance marketing and loyalty programs. We're also expanding our outbound sales efforts as well as our offerings for 3 Plus Bay business. On the EBITDA front, the team continues to deliver excellent results. Despite significant sales deleverage this year, we expect to end the year nearly 500 basis points higher in EBITDA margin than in 2019. This performance, along with other cost savings initiatives, is allowing us to increase our full-year EBITDA forecast for Topgolf, even with no change in the same venue sales forecast. We are proud of the team's performance in this important area, and looking ahead, we see significant opportunity for margin expansion when same venue sales returns to growth. On the venue expansion front, we're on track to add seven new owned venues this year, six of which we built, and one acquired. The new venues continue to perform consistent with our pro forma. In the quarter, we opened in Greensboro, North Carolina, and Des Moines, Iowa. Both venues are performing well. By year's end, we'll have 100 owned and operated venues. On the international front, our franchisees recently opened two new venues, one in Jakarta and one in Wuhan, China. for a total of seven franchise international venues. Looking forward, we expect to build and open approximately five domestic venues in 2025. Shifting gears to our golf equipment business, the market remains strong overall, with U.S. rounds up nicely year over year. Building on the gains in participation we have seen over the last several years, and despite a small decline in playable hours year-to-date due to slightly unfavorable weather. As previously mentioned, Data Tech's U.S. sell-through for clubs was down a little more than expected in Q3 at minus 4%, but remains flat year-to-date, which is a reasonably good performance in today's macroeconomic climate. Sell-through of golf balls was flat in Q3, but is up year-to-date, as has been its trend since and as you would expect given the rounds played data. Furthermore, the U.S. club market sell-through results for the second half of September and October bounced back nicely, making me think the small dip in Q3 sell-through was nothing more than normal volatility. Within these market conditions, the Callaway Club brand remains strong and continues to resonate with consumers. including, according to outside research, the sustained leadership position in technology and innovation. In the market, Callaway remains the overall number one market share club brand in the U.S., as measured by data tech sell-through dollar market share, a position we have enjoyed for nine out of the last 10 years. During this year, we have had a particularly strong year in woods, with the AI Smoke line propelling us to leadership positions in the driver, fairway, and hybrid categories, as well as the number one selling model in irons. We've also had a terrific year in putters, with Odyssey dominating the tour counts, including 39 consecutive PGA Tour counts, extending from the opening event in Hawaii through the FedEx Cup Championship, and including all four majors. And Odyssey also won every count this year on the LPGA, Champions, and DP World Tours. Clean sweeps across those tours. Odyssey was in the bag of 14 winners on the PGA Tour and 52 winners across primary global tours. Globally, our year-to-date putter category dollar market share is up 344 basis points in the U.S., 240 basis points in Europe, and 709 basis points in Japan. In golf ball, we continue to steadily deliver market share and brand growth as well as operational improvements. Our Q3 U.S. market share of 21.8% is up 140 basis points year over year and represents a new record for us. Additionally, we have now fully worked through our vendors' ball plant fire of a year ago with that plant rebuilt and back online, as well as additional capacity developed. And we continue to drive yield and productivity improvements in our Chicopee Mass facility, where all our premium or tour products are manufactured to industry-leading quality and consistency standards. On the brand side of golf ball, we also continue to make strides. Per Golf Data Tech's Summer Ball GPAU report, Callaway's ranking as preferred ball, as measured by the question, if you were playing in your club championship this weekend, which ball brand would you use, jumped from 16% to 21%. The highest level since tracking began, and the first time any brand other than Titleist exceeded 20%. We, of course, also had a few weak points this year, including foreign exchange, which is obviously outside of our control, volatile freight rates, which Brian will discuss later, and a slower than expected Korea market, where we initially lost some share, but we now see signs of both that market starting to stabilize and our relative performance improving, driven by a new team with renewed energy and resolve. Looking at product category opportunities, the Q3 launches of our Opus Wedges and Apex AI irons are both going well, and we think these will shore up what has been relatively weak for us year-to-date performances in these categories. The iron category is a big category, one where we have been a historical leader and one where the trade is telling us that we are well-positioned to gain share over the next year based on the strength of our product line. While we're on product launches, building on our strong recent performance in the putter category, we'll be formally announcing later this week our entry into a new form of putting, most commonly described as zero torque, via a new model for us called Square to Square. Zero torque is an interesting category, which is experiencing rapid growth, As we enter this category, we believe we can use our proprietary shapes, insert, and AI technology to deliver an even better product to golfers than is currently available in the category. The Square2Square product will be available to consumers in December. Looking forward, we feel good about both our golf equipment business and the market. Our product pipeline remains strong and we've started to show our 2025 product line to customers and are receiving positive feedback. Turning now to the active lifestyle segment, revenues and earnings were both down for the quarter, but this was largely consistent with expectations, and it masks fundamental improvements that we're making in all businesses within this segment. Turning to each business unit, at Travis Matthew, the overall market continues to be relatively soft with data tech showing U.S. sell-through of golf shirts to be down approximately 9% in its channels. But the Travis Matthew brand continues to outperform the market based on strong market share in its core men's product lines, further expansion into strategic categories such as outerwear and women's, and the addition of another 10 owned retail stores. On the retail storefront, we now have 57 owned retail stores and direct-to-consumer overall is approximately 40% of our business. The retail stores are high ROI investments and also drive brand growth and wholesale volumes in their markets. As mentioned on previous calls, this year's financial performance has also been challenged by the timing of a large corporate channel stocking order that occurred in 2023 and that did not repeat this year. but that opened up a new line of business for the long run. Excluding that specific corporate channel timing, Travis Matthew is up year over year both on the top and bottom line. This is a growing and profitable business with a bright future. At Jack Wolfskin, the business has been challenged by difficult market conditions in Europe and outside of China where we continue to perform very well this business remains a turnaround story. With new leadership in place here, we have been rescaling our cost base to fit the current revenue base of the business, while at the same time working on a product market fit in Europe by refocusing on the brand's core product and positioning. All of this turnaround work remains a work in progress, and Jack Wolfskin remains a relatively small part of our overall story. However, I feel better about the mid- to long-term outlook for this business. As sell-through in Europe picked up in late Q3 and early Q4, China continues to perform well, and by the end of this year, we will have a significantly smaller cost base as well as a more focused Europe product strategy. Lastly, in the active lifestyle segment, the Callaway and Ogeo brands are both performing reasonably well in the U.S. and Europe. In Japan, both apparel and performance gear are performing well on a local currency basis year-to-date, but showed down when restated in U.S. dollars due to foreign exchange. And our Korea business is down consistent with both the market and our struggles there, but as previously mentioned, we see improved signs for both our brand and that market in general. In conclusion, Q3 was a good quarter for us operationally. We remain pleased with the direction of our legacy business, where we're building on our strengths and addressing any weaknesses head-on. At Topgolf, we perform largely consistent with recent trends, including continuing to drive excellent venue profitability given the slower top-line environment. And we're taking steps to further strengthen the team's ability to drive positive same-venue sales over the long term. On the strategic front, we continue to believe that separating Topgolf from the legacy business will maximize shareholder value, and we are fully engaged on this work. I look forward to providing further updates, as appropriate, on future earnings calls. Brian, over to you.