Topgolf Callaway Brands Corp.

Good day, and welcome to the Topgolf Callaway brand's third quarter of 2025 earnings conference call. All participants will be in a listen-only mode for the duration of the call. And should you need any 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 telephone keypad. To withdraw a question, please press star, then two. And on today's call, we ask that you please limit yourself to one question and one follow-up during Q&A. Also, please be aware that today's call is being recorded. I would now like to turn the call over to Katina Metzodakis, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Good afternoon, and welcome to Topgolf Callaway Brand's third quarter earnings conference call. I'm Katina Metzodakis, Vice President of Investor Relations and Corporate Communications. Joining me 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 2025 financial results. Our earnings presentation, as well as earnings press release, are both available on our 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 identify these 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. Please review the Safe Harbor Statements contained in the presentation and the press release for more complete description. With that, I'd like to turn the call over to Chip.

Thank you, Katina. Good afternoon everyone on the call and thank you for joining us. Starting on slide three of our investor deck, I'm pleased to report that in Q3 our total business exceeded expectations in both revenue and EBITDA with revenue up year over year in both our golf equipment and top golf segments. This performance was driven by excellent market conditions along with solid execution in our golf equipment business as well as by an outstanding consumer response to our value initiatives at Topgolf, where we continued the impressive traffic growth that began mid-year, especially in the one to two bay portion of our business, which in turn set up an all-important transition to overall positive same-menu sales for the quarter. This performance, along with the trends we've seen in October, makes us increasingly confident in our strategic direction and supports the increased full-year guidance we're providing today. I'd like to thank the Topgolf Callaway Brands teams for their dedication and commitment to delivering these results. Moving to slide five in our segment performance highlights, starting with golf equipment. Overall, we continue to see strong performance in our golf equipment business, with Q3 revenue up year over year despite less new product launch volume in this year's quarter. And importantly, excluding the impact of tariffs, this is the third straight quarter of underlying gross margin expansion, a testament to our proactive efforts here and the excellent work being done by our teams. Market conditions overall remain excellent. The U.S. market is up 2% year-to-date, based on National Golf Foundation's manufacturer shipment data, but up an impressive mid-single digits on data tech sell-through reports. And Q3's data was stronger than the year-to-date data on both of these measures. This was supported by continued strong participation and interest in the sport. Rounds played are up 1.4% year-to-date, despite being down earlier in the year due to a wet and cool spring, with rounds played continuing to outpace playable hours, a trend we've seen all year. Market conditions are also up in Europe and the UK. While in Asia, Japan is down slightly year-to-date, and Korea is down low teens. Turning to our brand and market share performance, we gained shares slightly during the quarter, and had a particularly strong quarter in golf ball, with August delivering an all-time high U.S. share of 22.6% across both on- and off-course channels and 23% at on-course. On another positive note, according to DataTek's Summer 2025 Attitude and Usage Report, Callaway has retained its position as the leader in innovation and technology for the sixth consecutive time, According to the same report, this leadership position also helped drive further improvement in our overall brand rating. I remain confident in our brand strength as well as our product development pipeline. On the product front, our elite triple diamond driver was recently ranked number one in Golf Digest tests of spin consistency. This important performance attribute shows off how we utilize our leadership in AI capabilities to deliver an important performance advantage. And this ranking mirrors golf spies naming the elite triple diamond driver their most wanted of 2025. On the golf ball front, the Chrome Tour triple diamond golf ball was also named the longest ball in golf spies' independent testing. Lastly, in the putter category, after entering the zero-torque category mid-year, We're now already launching our second generation of this putter type, a product called TriHot, which differentiates in this new and hot category by providing a zero torque or tow up design, but requiring less shaft lean via a more forward hosel placement. This design innovation is, in our opinion, superior to other zero torque putters because it's easier to align, and requires less setup adjustment from golfers. All of these are small but important wins for our product and brand. We relish these wins because the cornerstone of our golf equipment strategy is delivering what we call DSPD or demonstrably superior and pleasingly different product. On the tour front, last month, men's world number four Xander Shoffley captured his 10th career PGA Tour title at the Bay Current Classic in Japan. And Jean Othetico continued her strong season with a win in Shanghai, further solidifying her position as Women's World No. 1. In summary, our golf equipment segment continues to perform strongly, supported by positive market dynamics. Our golf equipment segment revenues were up in the quarter and are up slightly year-to-date. This is despite more competitor product launches in early 2025 and lower new product launch volume from us in the second half of this year. On the profitability side, we are up year-to-date due to our margin and cost initiatives, but down slightly in the quarter due to the impact of tariffs, which of course have become more impactful recently. we remain excited about the direction of the golf equipment category and our brand. In the active lifestyle segment, excluding the Jack Wolfskin business from results, our revenues were approximately flat for the quarter with operating income down a little due principally to the impact of tariffs in the quarter. Travis Matthew continues to do better than the market overall, with revenues in the quarter approximately flat year over year. The brand continues to benefit from growth in its women's category. The Callaway brand in this segment was also approximately flat for the quarter, with market share gains in Japan apparel offsetting soft apparel market conditions in both Korea and Japan. Turning to tariffs. Across our products business, we had an incremental tariff expense of $12 million in the quarter, and we continue to forecast approximately $40 million for the full year. Given that the new tariffs were phased in during the year, along with the FIFO nature of our inventory, the impact will unfortunately increase meaningfully going forward, assuming, of course, that the current rates hold. We intend to mitigate as much of this impact as possible via efficiency improvements, pricing, and vendor negotiations. This is an ongoing process and a key initiative across our organization. As part of this, we recently implemented a reduction in force of about 300 positions. As we look forward in this environment, with continued positive demand, but likely higher product costs, I don't see further headcount reductions as appropriate However, we're going to have to continue to be very attentive to overall cost management and margin initiatives. And delivering DSPD product that stands apart in the marketplace will be more important than ever. Thanks to our long-term commitment to R&D and innovation, we feel optimistic about our ability to do this. Turning now to the Topgolf segment. Q3 results exceeded guidance for both revenue and EBITDA, including, as you'll see on slide seven, an all-important transition to positive same-menu sales of a little more than 1% for the quarter, driven by continued positive momentum in traffic. The big news here is that the one-to-two bay, primarily consumer portion of our business, that makes up 80% of annual revenues, has transitioned to positive same venue sales growth overall, with Q3 traffic up high teens and same venue sales in the quarter up 2.4% for this segment. This was driven by the continued consumer appeal of Topgolf, which, as you can see on slide eight, is ranked number one in both fun and atmosphere by 100x. Coupled with our new value initiatives, principally Sunday, Funday, and half-off golf Monday through Thursday, both of which were implemented mid-year. I couldn't be more pleased with the immediate and significant response to this strategic repositioning. I believe the consumer insight and execution here was just terrific, and the clear results bode extremely well for our future outlook. We will be continuing these value initiatives for the foreseeable future, while also working on further optimizing our marketing and continually introducing new reasons to visit Topgolf. Focusing on frequency for a moment, we have already seen improved results year-to-date based on a successful launch of our summer fund passes, and we are now in the early stages of implementing a new membership or subscription program we call Playmore. Turning to our 3 Plus Bay business, which is primarily driven by events. While we continue to experience declines here, we've begun to see a leveling off in this portion of our business. This can be seen in both our actual results and our leads. We also have several initiatives planned during Q4 to further improve this performance, including per player pricing, dedicated marketing, and online booking capabilities for three to four Bay events. Looking more deeply at the balance of the year, we expect same venue sales to be approximately flat year over year for Q4, resulting in same venue sales of down mid single digits for the full year. As a reminder, Q4 same venue sales are disproportionately impacted by our three plus Bay business, which is historically been approximately 30% of the sales mix in this quarter and are even more heavily weighted towards the end of the quarter due to holiday parties. On the digital front, we continue to roll out our new Toast point-of-sale system. Where implemented, this system has improved speed of service, which in turn drives improved labor efficiency and spend-per-visit. we expect Toast to be in a little over half of our venues by year end and all venues by end of Q2 next year. During Q4, we will also be piloting both pay-in-bay and mobile ordering for food. We are optimistic that these will deliver further gains in efficiency and spend per visit when scaled in 2026. Moving to profitability. Our venue EBITDA margins remain strong at just over 33% in Q3, around flat year over year, despite the increase in our value offerings. We maintain our expectation of EBITDA margin contraction for the full year, though we are trending to be on the better end of the guidance of down 100 to 200 basis points year over year. Given the strategic move to drive more value, We believe this demonstrates outstanding execution, and importantly, we remain confident in the potential for significant future upside. New venues continue to open well and deliver strong economic returns. We're on track to open four new venues this year, with our third opening just last week in Woodbury, Minnesota, and the fourth scheduled to open in New Braunfels, Texas in December. Lastly, on the leadership front, We are in mid-process on our Topgolf CEO search. I'm pleased with the interest in the position and the quality of candidates. Additionally, the current team is performing well in the interim, and I remain confident in their ability to do so. A special call out to Aaron Chamberlain, Topgolf COO, who is now serving as interim president. And also, a big thank you and well done to the entire Topgolf senior leadership team, for stepping up during this period of transition. In conclusion, Q3 was an excellent quarter, highlighted by the fact that both the golf equipment category and our brand remain strong, as well as Topgolf's continued momentum in driving traffic growth, including a positive same-venue sales performance in Q3 and an improved outlook for the balance of the year. These results support us raising our guidance for the full year. I also want to reaffirm that we remain committed to the separation of Topgolf and are fully engaged in that strategic process. Lastly, we continue to believe that our strategic direction, coupled with the solid execution that we are delivering, will unlock even greater value for our shareholders and allow both businesses to thrive independently. Thank you. And over to you, Brian.