Q2 2022 Callaway Golf Co Earnings Call
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Once again, you're holding for the Callaway golf, we are still many additional participants in the call should begin shortly we do thank you for your patience and please continue to standby.
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Good day and welcome to the Q2 2022 Callaway Golf Earnings Conference call Today's conference is being recorded.
At this time I would like to turn the conference over to Patrick Bourke Senior Vice President of Global Finance. Please go ahead.
Thank you Justin and good afternoon, everyone welcome to Calloway's second quarter 2022 earnings Conference call.
Patrick Burke, the company's SVP of global Finance joining me as speakers on today's call are Brewer, our president and Chief Executive Officer.
And Brian Lynch, our Chief Financial Officer, Jennifer Thomas Our Chief Accounting Officer is also in the room today for Q&A.
Earlier today, the company issued a press release announcing its second quarter of 2022 financial results. In addition, there is a presentation that accompanies todays prepared remarks and may make it easier for you to follow the call. This earnings presentation as well as the earnings press release are both available on the company's investor.
<unk> web site under the financial results Tac.
Most of the financial numbers reported and discussed on today's call are based on U S. Generally accepted accounting principles and the emphasis 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. This call will in court include forward looking statements that involve risks and uncertainties.
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 like to turn the call over to Jeff.
Thank you Patrick and good afternoon to everyone on our call and thank you for joining us.
I am pleased to report strong second quarter results driven by the continued strength of all three of our business segments.
Total net revenue was just over $1 $1 billion up 22% year over year.
So through to the bottom line was strong as well with adjusted EBITDA of $207 million up 26% on a reported basis.
These results clearly show continued momentum across all of our business portfolio and leave us in a position of strength as we look to the full year and the long term.
Shifting to our segment overview I'll first start with top golf second quarter results.
The top golf team put up another outstanding quarter with same venue sales up approximately 8% versus 2019.
Consistent with the expectations, we provided last quarter.
We continue to experience overall strong demand some of which is offset by staffing challenges that continue to impact us and as we understand it the entire restaurant and service industry.
Looking forward, we believe our same venue sales projection for the balance of the year will be positive mid to high single digits versus 2019.
This would put our full year same venue sales up mid to high single digits.
<unk> with our previous guidance.
Like most other businesses, we're seeing continued inflationary pressures across all inputs, including wages and cost of goods.
To offset this we're taking low to mid single digit price increases during this quarter and we will also be raising select hourly wage rates to make sure.
Main competitive.
And then our hourly playmakers are well taken care of.
Based on everything we've seen so far we believe the price increases will be able to offset the inflationary pressures without negatively impacting usable demand.
We saw no falloff in demand when we took a similar amount of price at the end of last year and we continue to see excellent demand for the top golf experience.
Our price increases are also modest relative to others, we're hearing about in the market.
New venue openings remained on track in the second quarter and continue to open well during Q2, we opened two new owned and operated venues one in Philadelphia and one at the previously mentioned Elsa Good deal, California location.
Also just last week, we opened our newest venue format in the Seattle Metropolitan area.
This is the first of a new venue format that benefits from a larger more open lobby area that includes golf simulators.
This venue format, which will use in select markets going forward will add to our cross brand synergy strategy by including a callaway branded fitting studio in the lobby.
Looking forward, we plan to open one additional venue in Q3 for a total of 2% in the quarter the.
The fourth quarter, we will then be our largest quarter for openings with six now planned for that quarter. This will deliver 11, new owned and operated plus two franchise international venues for the full year. The most in our history and another sign of strong performance.
Eight of the owned and operated venues will open in the second half of this year and.
An impressive accomplishment, but also one that will lead to lower operating margins in the second half mostly in Q4 due to the preopening expenses associated with these openings.
Our pipeline for future venues remains strong and is developing according to plan.
During Q4, we will also be phasing in a healthier level of marketing investment highlighted by an exciting new campaign aimed at both brand building and driving long term volume.
We view this as a valuable investment into the long term health of our business and I look forward to sharing the new campaign with you later this year.
As discussed at the Investor day already and the team have also started to implement new digital reservation technology at the venues.
To further improve long term efficiencies our operating margins have been excellent year to date, and we remain highly confident in our ability to deliver against our stated venue profitability goals. Both for this full year and long term.
Turning to the top tracer business, we installed 2065 days in the quarter, a new record for us.
And we remain on track for 8000 or more base this year.
Feedback on the product and demand both to remain strong.
As evidenced by our Q2 results. We are also making nice progress in ramping our installation capacity.
In the media business as discussed at our Investor Day earlier. This year, we're working on another mobile game, which we expect to launch later this year.
We are currently hesitant to forecast meaningful financial impact from this project. We are excited about it and it's an excellent example of how we plan to leverage our content creation capabilities across all of our various platforms.
Before I continue to our other business segments I want to highlight that our ability to continue to put up quarter after quarter of strong results furthers our confidence in the success of this business in the long term outlook presented at our Investor day.
If some investors initially looked at the top golf business is either riskier unproven I believe the string of consistent results since our merger should soon begin to change perspectives and valuations.
As we look out over the next few years, we are confident top golf will be a significant source of long term value creation.
Already in 2022, it is forecast to be our largest segment by revenue.
And even with the strong growth forecast across our other business segments.
This segment alone is expected to account for more than half of our total adjusted EBITDA by 2025.
Top golf is the Keystone of our modern golf thesis.
It already has a dominant leader in the dynamic off course golf industry, and we believe it or maintain this position given its significant growth prospects ahead.
And in our forward guidance I'm sure you'll notice there were once again, increasing our projected full year EBITDA for this exciting segment of our business.
Moving to golf equipment, the business had another excellent quarter with revenue exceeding expectations up 13% year over year.
We now expect this segment to be up 12% or more for the full year, an increase from the approximately 10% we said previously.
As demand continues to remain strong in the key U S and Asia markets supply chain restrictions have abated.
And we're having strong market share performance.
In Q2, we also benefited by supply and the launch of our new draws raw wedge slightly earlier than planned.
According to the data tech in the U S. Despite comparatively poor weather conditions this year.
Second quarter hard goods sell through was down just 2% for 2021 and remained up 37% over 2019.
Outside the U S market conditions vary during the quarter, Japan was up 5% in Korea was up 11%.
The U K and Europe were both down approximately 10%.
Overall, we are pleased with the market conditions and continue to see the avid golf consumer is healthy and engaged.
We have also been very pleased with the performance of our 2022 products with sell through trends in overall market share is increasing as the year progresses, especially for our ROE gas G drivers and fairway woods as well as our chrome soft golf balls.
We finished the second quarter as the number one hard goods brand in the U S and delivered U S golf ball market share of 27% year to date.
Both of these are record results.
To offset inflationary pressure, we have raised prices nicely this year and as the avid golf consumers, both affluent and passionate there's been no discernible pushback.
With continued innovation, we expect to be able to continue to offset inflationary pressures in this manner.
On the manufacturing side supply chain pressures are easing and our supply chain is continuing to perform well despite periodic COVID-19 flare ups or other challenges we expect it to continue to be a source of relative strength going forward.
In the first half of 2022 like other Oems. We also benefited from an overall inventory catch up at retail.
We now believe trade inventory levels have largely normalized to appropriate levels, neither too high nor too low in our opinion.
Lastly, the active lifestyle segment had a strong quarter with positive momentum across all our brands Rev.
Revenues for this segment increased 39% versus second quarter last year.
The Callaway branded business in this segment remains strong globally with our apparel business in Asia, performing well and our gear business, namely golf bags gloves, delivering both market share and revenue increases.
Meanwhile, Travis Matthew had another outstanding quarter, continuing the strong brand momentum and delivering strong double digit growth across all channels.
This business remains on track to deliver approximately $300 million in revenue this year and $50 million or more in adjusted EBITDA.
Travis Matthew opened three new stores in the second quarter, including our first two stores in new England and one in Ohio.
The brand continues to prove itself in all U S markets and is also beginning to gain a foothold internationally.
Also during the quarter, we had one of the most exciting product launches and Travis Matthew history, the Travis Matthew Womens.
While this launches preliminary collection and not a major source of revenue to date, we are both confident and excited about the opportunity here, particularly given that women account for over 25% of the purchases made through Travis Matthews direct to consumer channels.
Throughout this year, we plan to continue to test and collect feedback there'll be used in product development and brand direction for our 2023 women's collections.
The Jack <unk> business continues to make good progress and showed double digit revenue growth for the quarter, despite difficult macroeconomic conditions in both China and Europe .
Our overall brand strength in pre books continue to build momentum.
We believe this brand is on strong footing and position for growth even with the challenges presented via current and anticipated macroeconomic and FX headwinds in Europe .
When looking at the active lifestyle segment on the whole we're on track to deliver approximately $1 billion in net sales for the fiscal year no change from our previous forecast.
Turning back to the consolidated business, while I don't want to talk too much about risks because our business is best defined.
By the vast opportunities in front of us and Thats, what energizes us and will drive significant value.
We are a growth company and we're proving ourselves here quarter after quarter.
However, given the nature of today's uncertain environment and my perception of the Investor community is understandable concerns here I'd like to spend a brief moment, giving my perspective on how the current macroeconomic risks may impact us.
Earlier this year there was a lot of concern about a reversion in golf consumption.
Clearly halfway through the year the data shows there has been no reversion.
Perhaps a small reversion will come at some point and perhaps it will not however, I can see no evidence of one so far especially with avid golfers.
And if there is a reversion I for one would expect it to be modest.
Inflation has been an issue for us as it is for most companies, but across all of our business segments. The data. Thus far shows we can take price to largely offset it.
A recession driven pullback in consumer spending as an ongoing risk but.
But we also have strong momentum in our business segments and based on the historical data that we have our segments overall are not highly sensitive to a mild recession.
FX is a real headwind for us as it is for all global companies.
If rates stay where they are currently they will have a short term impact.
However, we have managed through large FX movements before and we will be able to do so again now I did not anticipating having a long term impact.
I believe it's best to focus on the data and history.
These points to the conclusion that we present less risk than most businesses and that our growth is more reliable.
Given is driven by new venue openings.
Brands that have significant momentum and our concentration in a healthy growing business segments, where consumers are both well off and passionate.
In conclusion with the continued strength, we're seeing across our businesses, we are taking up our full year financial guidance.
Where specifically increasing our full year forecast for both top golf and the golf equipment business.
Consumer demand remains strong in all our primary segments.
And our primary consumers appear to remain passionate healthy and engaged.
We're increasingly confident that we're on track to achieve the long term goals outlined at our Investor Day earlier this year, where in fact ahead of plan so far.
And that we're well positioned to positively work through the current macroeconomic climate.
And with that I'll hand, the call over to Brian to discuss our financials and outlook in more detail.
Thank you chip and good afternoon, everyone.
As chip mentioned, we are very pleased with our second quarter results, which were very strong.
It is those results along with improved supply chain conditions, our ability to take pricing to offset inflationary pressures and our continued strong momentum in each of our operating segments that gives us the confidence to increase our full year guidance today.
Before discussing our revised guidance in more detail I'll first cover our second quarter results.
For the second quarter consolidated net revenues was $1, one 2 billion.
An increase of 22% compared to Q2 2021.
Changes in foreign currency rates had a negative $38 $6 million impact on second quarter 2022, net revenue compared to the same period in 2021.
Looking at our segment performance top golf contributed $404 million in revenue in the quarter at 24% increase over 2021 and reported same venue sales growth of seven 9% compared to 2019.
The strong same venue sales performance in the quarter was driven by strong social and corporate events.
With the corporate events business showing its first quarter of positive same venue sales since the pandemic began.
Golf equipment had another excellent quarter generating $452 million in revenue at 13% increase over Q2 2021.
Driven by continued high demand strong market shares and improved supply and golf equipment, which allowed for an inventory catch up at retail.
Lastly, our active lifestyle segment had revenue of $260 million with each of the four active lifestyle brands up double digits versus.
Q2 2021.
Total non-GAAP costs and expenses were $981 million in the second quarter of 2022 compared to $796 million in the second quarter of 2021.
The increase was driven by increased variable expenses in our operating segments as well as increased corporate support increased freight cost and other inflationary pressures.
Second quarter 2022, non-GAAP operating income was $135 1 million.
Up $17 $1 million year over year or 14, 5% increase.
Continued strong demand along with the pricing and other business improvements we implemented this year have allowed us to outrun the increased operational expenses we are experiencing.
While changes in foreign currency exchange rates had an unfavorable impact on operating margins.
On a constant currency basis, non-GAAP operating margins increased 40 basis points in the second quarter of 2022 compared to the prior period.
Moving back down the income statement non-GAAP other expense was $19 5 million in the second quarter of 2022 compared to $27 million in Q2 2021.
This improvement is primarily due to an increase in gains on foreign currency contracts in the second quarter of 2022, partially offset by higher interest expense.
non-GAAP earnings per share was <unk> 47 on approximately 201 million shares compared to 36 per share on approximately 194 million shares in the second quarter of 2021.
The increased share count was primarily related to an accounting change that took effect on January one 2022, which requires that we include $14 7 million shares related to the assumed conversion of the company's convertible notes.
I want to remind you that applicable accounting rules do not give any effect to our capped call and calculating EPS.
Upon settlement it should reduce the actual number of shares we are required to deliver by approximately 3% to 5 million shares depending on stock price.
Lastly, Q2, adjusted EBITDA was $207 million up $43 million or 26% over Q2, 2021, and our EBITDA margins improved to 18, 6% compared to 18% for the same period last year.
Great.
Turning to certain balance sheet items.
We remain in a strong financial position with ample liquidity.
As of June 32022 available liquidity, which is comprised of cash on hand, and availability under our credit facilities with $640 million compared to $877 million at June 32021.
The decrease from last year was due to planned working capital increases in the golf equipment and active lifestyle businesses to support growth as well as continued investment in top golf venues.
The $640 million of availability was an increase from the end of Q1, when we had $576 million of availability.
As a reminder, we expect top golf will be approximately self funding in 2023 and cash generating in 2024.
At quarter end, we had total net debt of $1 7 billion.
Including venue financing obligations of approximately $670 million related to the development of top golf venues and including the convertible debt of approximately $259 million.
Our net debt leverage ratio was approximately three two times at.
June 32022, compared to two nine times at June 32021.
Our leverage ratio and our funded debt basis was below 2.0 tax.
Consolidated net accounts receivable was $376 million as of June 32022, compared to $325 million at the end of the second quarter of 2021.
The increase was primarily due to the increase in revenue the quality of the accounts receivable remained strong.
Our inventory balance increased to $604 million at the end of the second quarter of 2022 compared to $534 million at the end of the fourth quarter 2021, and compared to $335 million at June 32022, I mean excuse me in 2021.
The increase in inventory primarily relates to being under inventoried in the prior periods due to the supply chain disruptions, we experienced last year.
Inventory turns and days inventory on hand are consistent with pre pandemic levels. We.
We feel very good about the quality of our inventory.
As you can imagine when we were very short on inventory over the last two years during the pandemic, we sold whatever was available and therefore cleaned up any old inventory.
Capital expenditures for the first half of 2022 were $154 million net.
Net of reimbursements. This includes a $120 million related to top golf.
For the full year, we expect total capex of approximately $325 million net of reimbursements, including approximately $250 million for top golf and $75 million for the non top golf business.
Now turning to our balance of the year outlook.
We are revising our full year 2022 revenue expectations to $394 5 billion to $3 97 zero billion compared to previous guidance of $3 $93 5 billion to $3 97 zero billion.
Changes in foreign currency rates are estimated to have a negative impact of $129 million for the full year.
<unk> assumes 12% or more revenue growth for the golf equipment segment for the full year, which is up from the prior estimate of 10% growth.
The guidance also assumes approximately $156 billion in revenue for <unk> This year.
Assistant with previous guidance and approximately $1 billion of revenue from the active lifestyle segment, which was also consistent with previous guidance.
Our full year adjusted EBITDA forecast also increased and is now projected to be $555 million to $565 million, which assumes approximately $235 million to $245 million from top golf.
At midpoint. This represents a $15 million increase from the previous guidance, primarily due to increases in both the golf equipment and <unk> segments.
For the full year 2022, adjusted EBITDA is expected to increase over $100 million compared to 2021.
For the second half, we estimate revenue to be within the range of $1 79 billion to $1 5 billion.
Which includes an estimated $69 million of negative foreign currency impact.
We expect the top golf segment to be up approximately 25.
<unk> driven by same venue sales in the mid to high single digits and buy additional venues with two opening in Q3 and six opening in Q4.
We expect the golf equipment segment to be up low to mid single digits in the active lifestyle segment to be up mid teens for the second half of the year.
In total second half revenues are expected to increase by approximately 15% compared to the second half of 2021.
The company currently estimates that it's second half 2022, adjusted EBITDA will be within the range of $178 million to $188 million versus $153 million in the second half of 2021.
This represents an approximate 20% increase.
Our business has become increasingly difficult to forecast on a quarterly basis as many factors can cause a shift between quarters, including new product launch timing marketing campaign timing weather timing of venue openings and timing of supply shipments to name a few.
With that said, we are providing some guidance on Q3 and Q4, but please recognize that the results could shift between those quarters.
Total company third quarter 2022, net revenue is estimated to be between $940 and $955 million versus Q3, 2021 net revenues of $856 million.
This assumes $42 million of negative foreign currency impact for the third quarter of 2022 compared to 2021.
Given the second half launch timing of golf equipment products in 2022 versus <unk> 21, we expect golf equipment will be down mid to high single digits for the third quarter.
But as expected increased double digits in the fourth quarter, resulting in 12% or more growth for the full year.
The top golf and active lifestyle segments are expected to grow double digits in both the third and fourth quarters.
Total third quarter 2022 revenue is estimated to grow approximately 11% compared to 2021.
Given the foreign exchange headwinds and difference in product launch timing compared to 2021, we expect 2022 adjusted EBITDA will decrease in the third quarter, but increase in the fourth quarter.
Third quarter adjusted EBITDA is estimated to be between 122 and $132 million versus $139 million for the same period in 2021.
We expect that adjusted EBITDA will increase by approximately $40 million in the fourth quarter compared to 2021.
Resulting in an overall increase of 19% for the second half of 2022.
In summary, we've had a great start to the year and are optimistic that the balance about the balance of the year.
While we are not immune from foreign currency and inflationary pressures. This year. We believe we can continue to manage them.
Each of our operating segments are performing well and enjoying strong brand momentum.
Consumer interest and demand remains strong across our businesses, giving us the confidence to increase our full year guidance. Despite the macroeconomic challenges.
Looking even further ahead, we will have some headwinds in 2023 foreign.
Foreign currency rates are expected to continue to be a headwind in the hedge gains. We have this year are not expected to repeat.
We will also not have the benefit of the channel fill and the golf equipment business that we had this year as retail inventories generally back to normal levels.
With that said, we believe we will continue to benefit next year from new top golf venues as well as continued strong consumer desire for leisure and entertainment such as top golf hiking golf and other outdoor activities.
We are fortunate that our consumers are generally well off and passionate.
As a result, we expect to grow in 2023, despite the current macroeconomic headwinds.
In addition, we expect to benefit from the additional pricing and other actions we plan to implement and we expect freight expense to abate somewhat in 2023.
Overall, we're optimistic about next year and are confident in our ability to create shareholder value over the long term.
That concludes our prepared remarks today, and we will now open the call for questions operator over to you.
Thank you if you would like to signal with questions. Please press star one on your Touchtone telephone if you're joining us today using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment youll.
You will hear a tone, indicating when your line is open at that point. Please state your name and then pose your questions in Ids.
<unk>, please limit yourself to one question and one follow up question.
Again that is star one if you would like to signal star one for questions and.
And we will go ahead and take the first question.
Okay.
Hi, This is Alex <unk> from Bank of America. Thanks for taking my questions and congrats on the strong quarter here.
First I wanted to ask on sort of what led you to take up the guidance on the golf equipment side is it.
<unk> is playing out better than you expected and then just maybe off that can you give us a bit more color on the launch timing shifts and how that sort of impacting <unk> versus <unk>. Thank you.
Sure Alex.
Our confidence in the golf equipment business is based on the strong results we've seen.
Sure.
Thus far and really over an extended period of time, we're very.
We are pleased with how the markets are in total.
And they're continuing to.
Show, a very engaged consumer.
And we are gaining market share as the year progresses. So.
If you could track as a market share or whatever measure you would look at.
In our key markets.
In all of our golf equipment category is really we're seeing continued and increasing strength as the year goes on so.
I feel very good about that and that.
Happy to be able to take up our expectations for the full year or two what I think are very strong.
Numbers.
Then.
On the timing issue in Q3.
That is.
There is some FX in there that of course weighs heavily on all results.
But it's also just short term launch timing as I mentioned in my comments, we pulled forward because of our great supply chain performance.
Performance, a little bit of the jaws raw, which is our new wedge launch into Q2.
We had not originally planned for that to be in Q2, but.
We had the ability to ship a good portion of that launch in the quarter. So we took advantage of that.
And we really don't have any significant launches in the quarter.
This year, but last year, we had some.
Reasonably substantial launches, particularly a product in Asia.
That was a significant one for them and that will not repeat I think it's worth noting that thats just timing because of the half is up in all measures, including golf equipment.
Perfect. That's really helpful. And then just my next question maybe could you just give us a little more color on the outlook for top golf and I guess, maybe just on that could you maybe give us a little more color on sort of the monthly cadence of the top golf comps I think you said that March exit rate was up 10% in men.
<unk> thousand reported last quarter has there been any sort of deceleration that you've seen at all and then just on the outlook. There you sort of picked up the.
You took up the adjusted EBITDA guidance on a semi or same venue sales outlook could you just maybe give us some color on what's driving that.
The.
So monthly cadence I'm not going to get into too much detail on monthly cadence as you can tell we had an excellent quarter with same venue sales up eight.
8%.
We're continuing to see strong demand at top golf Theres always.
Small variations on a month to month basis, but the trends have been quite.
Quite strong continuing strong.
Got great demand for that product and.
We feel very confident and pleased with that so nothing to speak of on a monthly basis.
Other than continued momentum in.
Probably building capabilities there as we go forward because the events business has been especially strong.
And on the EBITDA basis, what we're seeing is.
Some strong operating margins there.
Exceeding what we had originally expected.
And we are labor constrained there.
So that is even moderating the overall same venue sales they would be higher if we had more.
Labor available.
But the operating margins are driving the increased EBITDA results and there is really strong performance across the business.
Perfect. Thanks, a lot best of luck going forward.
And we will go ahead and take the next question.
Hey, guys. Good afternoon, Hello from Raymond James I appreciate the question.
Question on top golf sale.
Sales number can kind of parse out how much of that ticket.
Traffic.
Sure. So the same venue sales at top golf.
Growth, it's a mix as you would expect for through the first.
Half of the year was about 70% price and 30% volume.
And but the volume.
Volume was constrained as I mentioned so.
We believe it would have been more of an equal balance it if it was unconstrained we continue to have excellent demand.
Got it and maybe a follow up to that.
Analyst day wasn't at.
That.
That much ago, but.
The four wall economics.
The top golf has that changed at all given the new interest rate environment that we're in today.
I'm sorry can you repeat the question was it four wall profitability or what was the.
Yes, given that interest rates have risen over the last couple of months here I'm curious how the four wall economics of where you are.
No theres been no change because our we have not as we mentioned at the Investor Day, There has been no change in the.
Cap rates in our refinancing those are locked in in advance, but as the business continues to strengthen we have not had any increase.
The cost of the REIT debt, so no no impact.
Okay, great. Thanks appreciate it.
Thank you we'll go ahead and take another question.
Hey, good afternoon, guys Dalenberg from Stephen Thanks for taking our questions.
I wanted to start on a comment you made I think during your prepared remarks, you mentioned youre expecting from higher advertising costs in the back half of the year was that comment specific to top golf where across your other categories.
What's your outlook.
Brian mentioned inventories are a bit more normal what's your outlook for promotions across the different product categories. As you look over the back half of the year.
Sure.
The comment on the <unk>.
Increased marketing was top golf specific.
We have not been doing.
A significant amount of marketing in fact, we've probably been under marketing relative to historical.
Metrics in the business.
And we will be increasing that marketing spend to a more sustainable level with the new program that we're really excited about starting in Q4 and that I think is at a very important and very valuable long term investment in that business.
The.
So that one.
Yes.
Typically was top golf and then in promotional.
<unk>.
Outlook or experience really globally, we're not seeing.
Much promotional activity and.
My guess is that we.
Don't see a lot this year, maybe more than last year.
Inventories have return to healthier levels.
But.
Certainly I would expect less than historical and I am not expecting it to be.
Very promotional at all really.
Great. That's helpful and then Brian from a follow up just looking through the segment profitability. It does look like golf equipment pre tax margin stepped down a bit.
Pretty strong 13% year over year growth was there anything one time embedded in that segment margin or what were the primary drivers of that decline.
Segment basis.
Oh.
Golf is primarily the freight expense, which for Q2 and the first half and then FX.
So those are probably the two biggest drivers.
Without that we would have been up.
And some of that is just geography because of that.
The FX hedge gains.
I expect to be up second half for that.
So the freight the freight gets better less headwinds because they ramped in 2021 and the FX should.
<unk> side, a little bit, but it was still it will still be there.
Great. Thanks, so much guys.
And we will go ahead and take another question.
Oh, hi, Kevin even from Jpmorgan, Thanks for taking the question.
I just wanted to ask about the <unk>.
Club business within the golf equipment, and how you've seen the market share trend throughout the year as fittings have increased.
And then secondarily.
What do you attribute the market share gains too on the ball side and how you see the sustainability of that trend go forward. Thanks.
Sure Kevin.
The market share on the club side has really ramped during the year as the.
The product got out to retail and the more fittings more large hotter testing that went.
In the play that better we have done and.
We're at.
Record market shares in many categories and really surging in that area. So I think it's clearly a testament to the the.
The quality of the product.
And on the ball side.
We have great market share, obviously were record shares, but <unk> seen a trend really that goes ultimately back to 2013 of consistent.
Market share gains and growth in our golf ball business.
We have a differentiated product in a strengthening brand we have a <unk>.
Strong distribution network and.
It's not like this change is a Johnny come lately scenario. This has been an ongoing long term trend of.
Market share gains that just happens to be continuing as we would hope it would.
Great and if I could just ask one follow up on the top golf business.
How does the customer profile look.
Maybe by average income and have you seen any impact to date.
Either on spend per visit or trips.
The inflationary pressures in the market and maybe just how to think about kind of the expense structure there.
If there were to be a downturn.
Kevin we have not seen any pullback in demand.
Just the opposite we are seeing strong demand and were.
Long waits.
We're not able to satiate all of the demand so.
Continued strength in that business the consumer as a young consumer engaged consumer there it's right in the wheelhouse of some really trends that people getting out and enjoying the social activities.
It's almost an affordable experience that you do one to two times a year for majority of the consumers. So it's not.
Something that.
Will.
Be that susceptible to.
Changes in trend if there is a mild recession.
And the consumer there is also reasonably well off not as well off as the.
Golf consumer, but 90 to 100000 average income.
<unk>.
We can just tell you what we see so far in <unk>.
So far excellent demand.
With strong trends.
And on the contingency side I think if there is a downturn you saw during the pandemic was a great example of that they were able to adapt and cut costs.
Preserve cash.
Significantly I think they cut capex by.
Well over $100 million when they needed to so there's a lot of there's a lot of flexibility in that model.
Great. Thanks, so much guys.
Thank you and we'll take another question.
Okay.
Brett from Keybanc.
I think you said channel inventories were normalized.
I think there was some slightly different commentary maybe from acoustic today. So could you just maybe elaborate a little more on where your channel inventory dollars versus 2019 weeks on hand, However, you want to.
Frame that up and maybe specifically what they look like here in the U S and then internationally.
Sure Brett.
Can speak with some accuracy relative to the U S.
Uh huh.
Just generally internationally, but.
If you look at the total U S market the months on hand in clubs of inventory is three four months versus three 7% to three eight in 2018 and 19, so still a little lower.
In general than 2018, 2019, but the market is significantly bigger so the absolute values are larger and Thats why I say, it's relatively normalized and in a positive perspective.
Our inventory is three one months, so lower than the overall and in the cloud side roughly consistent with what it was in those previous periods. So our supply chain has done an excellent job.
Creating an advantage for us.
Our results show that.
We're in a strong position going forward I also want to say say, Brett Theres, obviously, a lot of focus on inventory.
Both internally.
And externally.
Our partners are very attentive to it we are very attentive to it.
The possibility or the probability of us being surprised on inventory.
Getting out of hand.
Is remarkably low without a black Swan event.
We're tracking sell through and inventory levels.
On a daily to weekly basis.
<unk> categories et cetera. So.
Very much on top of it and what you see in our numbers is just the result of excellent supply chain performance and.
Yes, I think the numbers speak for themselves in terms of where everything.
Ended up.
Got it that's all.
And then.
I don't know if this is a stupid question or not but do you see any impact to.
The broader health of the sport or your business here from winter between the PGA tour and the lids or I guess, whether thats, how you allocate towards spend whether it's just the total eyeballs on the sport.
Just any high level thoughts there or is it just noise.
Yeah, we're not sure.
How to think about that at this point clearly getting a lot of attention and I'd say.
An interesting and important aspect for golf weather live ends up being a.
Good thing or a bad thing is to be determined and we're in a wait and see approach at this point.
On that I don't think at this point it has a specific impact.
On us as an equipment manufacturer or as a brand.
But certainly a topic of a lot of conversation and debate around the game of golf and in fact.
It might even be giving golf.
A little added.
PR and conversation value I Havent seen golf in the Wall Street Journal and in so many.
Commentaries in a long time.
That's a fair point thank you.
And we will go ahead and take the next question.
Hi, Good evening, it's season Anderson from B Riley.
I was wondering if maybe you could talk a little bit about the apparel business.
It sounds like Travis Matthew continued very strong growth Hany, if you could talk about the Callaway brand and then also Jack and I'm curious how that performance is doing I know its still pretty tough in China and then also over in Europe .
Sure Susan.
You're exactly right Travis Matthew continues to kill it that business has such outstanding momentum.
And <unk>.
Strong double digit growth across all channels proving itself in all markets and starting to get established internationally et cetera. So I.
Couldnt be more bullish on that.
One of the big initiatives over the last year was.
Starting in our apparel business.
In Korea that has gotten off to a very positive start.
Our overall business in Korea remains strong and is now growing significantly and so we're very pleased with that initiative.
And.
Turning to Jack Lope skin.
You would have thought they would've been a conversation topic of.
Some note on the call given their presence in China.
And in Europe , where the macroeconomic climate is as difficult as it is anywhere in the world.
But they haven't been they.
They delivered strong growth overall in the quarter even.
Currency neutral Youll notice, we havent been reporting all of our numbers currency adjusted because all of them would be significantly higher.
But the numbers speak for themselves and.
The pre books it Jack also remain very positive so.
We do expect that market environment to be challenging.
Certainly through the end of the year, probably next year.
But the team has done a wonderful job and continuing to.
Develop and grow that business the brand momentum feels good in the pre books with it.
Great that sounds positive and then if I could just follow up on your capital allocation strategy I think there was on the slide.
There was the priority obviously opportunistically explore investments so just curious your thoughts around.
Acquisitions do you feel like Youre in a spot to make another acquisition and if so could you give some thoughts around what you would be looking for to complement the business.
Hi, Susan this is Brian .
The good news is we don't have to do any acquisitions, we have a lot of embedded growth with our current business and a lot a lot to unlock.
Hey, Eric.
Priority has always been to invest back into our business and then.
Particularly in this environment, we're focused on maintaining reasonable leverage ratios, but after that we'll balance between investing in other areas and returning capital to shareholders, but.
But I don't there's no there's no burning desire, we don't have to we will be opportunistic.
Great. That's helpful. Thanks, so much good luck from SCR.
Thank you.
And that does conclude the question and answer session I'll now turn the conference back over to Mr. Chip Brewer.
Well I'd just like to thank everybody for tuning in we really appreciate your <unk>.
Interest in Callaway golf.
Wish you a great conclusion to your summer and we look forward to engaging with you again.
Throughout the.
The year and certainly on the next earnings call.
Thank you that does conclude today's conference. We do thank you for your participation have an excellent day.
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