Q1 2023 Topgolf Callaway Brands Corp Earnings Call
[music].
Good day and welcome to the top golf Callaway brands first quarter 2023, all participants will be in listen only mode.
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After todays presentation, there will be an opportunity to ask questions.
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Please note. This event is being recorded I would now like to turn the conference over to Lauren Scott Director of Investor Relations. Please go ahead.
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 Chipper.
Lauren.
Good afternoon to everyone on our call and thank you for joining us today.
Our business is off to a strong start with first quarter revenue and adjusted EBITDA coming in ahead of our expectations.
Our outperformance was driven largely by continued operational momentum at the top golf venues as well as a strong launch of our paradigm family of clubs.
Looking forward there is certainly some macroeconomic uncertainty around the world.
However across all of our business segments, our core consumers who remain engaged.
And we continue to believe our portfolio of brands is positioned to drive further growth in both revenue and profitability.
We believe we are uniquely positioned to do this by meeting our consumers in a diverse set of environments that they are highly passionate about.
Be that on course off course or in their active lifestyle.
This certainly includes leveraging the synergies inherent in our leadership position in both on and off course golf.
We like to call modern golf.
Turning to top golf specifically.
And I believe this is perhaps the key point investors should take away from today's call.
The team has various initiatives combined with their brand momentum.
Have both made us increasingly confident.
In our ability to drive long term same venue sales growth.
And we are now pleased to be able to communicate even higher venue profitability expectations.
This increased confidence and updated expectations have obvious and significant positive implications for the long term value of our company.
Shifting to our segment overview I'll first start with top golfs results.
The top golf venues business had another great quarter outperforming our expectations for both revenue and profitability.
Owned venues delivered 11% same venue sales growth over Q1 last year driven by continued brand momentum increased digital access through pie, our inventory management system, and our new marketing initiatives.
Adjusted EBITDA exceeded expectations due to continued improvement in operational efficiencies.
We will speak more on this operational efficiency improvement in a moment.
From a development perspective, we opened one venue during Q1 in Charleston, South Carolina, and it opened very strongly.
We remain on track to open 11, new owned and operated venues in 2023.
With one scheduled to open in Q2, and the balance coming in the second half of the year.
And top trace are also had a successful quarter with over 1550 bays installed compared to approximately 1160 last year.
For the full year same venue sales is now forecast to be up mid to high single digits.
A little lower than we thought when we spoke with you in February .
Due to corporate events trending lower starting late in Q1.
Our corporate business was strong to start the quarter and is still expected to be at approximately 2019 level levels for the full year.
However, with the March banking crisis, and what we believe is a trend towards many companies further reducing corporate spend.
We viewed it as prudent to lower our balance of year corporate sales expectations versus our original budget.
We view this revision as a reflection of near term volatility not a long term concern over the viability of our corporate sales channel.
And importantly, our walk in and small events business.
Which is the consumer driven portion and accounts for 80% of venue revenue.
Has remained robust.
Like our underlying operating efficiencies. This walk in in small event business will also benefit from the continued rollout of Pi.
Marketing and other key initiatives through the balance of this year and next.
As a result, we remain confident in our top golf earnings forecast for this year.
We have increased confidence in our ability to continue to deliver sustained same venue sales growth throughout business cycles, something we recognize we must prove to the markets and we hope that our six consecutive quarters of delivered same venue sales growth is starting to do.
Digging a little deeper into the digital access and marketing improvements at the venues I want to highlight some of the early success metrics, starting with top golfs come play around marketing campaign.
Our goal is to increase awareness, primarily in markets, where we have existing venues, but also more broadly given our growing national footprint.
We're happy to report that awareness and market has increased to 48%.
Up from 41% a year ago and 38% as recently as December 2021.
Pi our digital inventory management system is also showing very promising results.
As of the end of March we had implemented pie in 36 venues across the U S with the expectation of being in an all U S venues by the end of 2023.
Venues with Pi in place have seen increased bay utilization same venue sales growth and profitability.
With the help of Pi.
Team grew the digital penetration of our venue business by a couple of points again last quarter ending at just over 30%.
The opportunity to further drive awareness and our digital runway.
Our clear priorities for the top golf team.
The results are paying off and there is significant runway ahead to grow top and bottom line through these efforts.
I'll now turn to venue unit economics.
To further underscore the progress we have made as well as our confidence in the top golf venue business going forward. We are now updating the target venue unit economics and return metrics.
As you'll see in today's Investor presentation, we're now targeting 35% four wall adjusted EBITDAR margins up from 32% previously.
And a two and a half year payback period down from just over three years.
And a 20% return on gross investment up from approximately 17, 5%.
With these changes we also increased our cash on cash return projection from 40% to 50% to 50% to 60%.
In my opinion.
The updated adjusted EBITDA margin target is the big headline this quarter.
It shows an approximate 10% improvement in the venue four wall profitability versus the targets, we published in early 2021 and.
And nearly a 21% improvement versus actual results prior to our merger.
This new target reflects the progress we've made on a lot of fronts, including further improving our pricing and digital reservation strategies.
Inventory and labor management cost of goods sold and of course, our confidence in driving long term same venue sales growth.
These are sustainable long term changes they will benefit our long term outlook.
If you've been following our story you know we strongly believe that our top capital allocation priority is investing in the profitable growth of our business.
And that the largest portion of this is the investments we make in our venues.
Given these newly disclosed targets, we have even more conviction that this investment strategy will generate outstanding shareholder returns.
Moving to the golf equipment segment I'm very proud of the performance of our new paradigm line of clubs.
The entire line is doing extremely well and delivering rave reviews from consumers.
We launched paradigm in late February .
And then the very next month, the Callaway brand jumped to the number one U S brand position and the driver <unk> and iron categories. According to data Tech.
The paradigm driver in particular continues to outperform.
Both on tour and in the market with.
With eight wins on the PGA tour year to date.
And finishing the month of March as the number one selling driver model in the U S.
From a brand perspective, John Roms Historic success at the Masters wasn't an incredible and highly visible moment for our business with over 12 million viewers, making it the most watched golf telecast in five years.
We congratulate John and are thrilled to be partnering with him on what is a terrific run a great play.
On the women's side of the game Rose Jang has also had a phenomenal season, so far recently, winning the Augusta National Women's amateur tournament and.
In setting the record for the most weeks as the number one ranked women's amateur.
We are excited and honored to be a part of her already very promising career in golf.
Looking at the overall market for golf and the health of the game.
All major indicators continue to be solid.
Rounds played through March in the U S were roughly flat year over year.
But remain.
Significantly up versus 2019 levels.
And it also up versus even last year on a weather adjusted playable hour basis.
And overall interest in the sport as indicated by the Masters ratings remains very high.
Turning to equipment sales specifically the market started the year, a little behind our initial expectations of flat to slightly down for the full year.
But we view this as totally understandable given the economic climate and how many entry level sets were purchased over the last few years.
Fortunately our product performance is at or slightly ahead of our expectations.
We see these factors essentially balancing each other out.
Overall, we feel good about the health of our core golf consumer.
And despite macroeconomic uncertainty, we don't see meaningful risk given both our brand heat.
And how passionate the consumer is about both us and golf in general.
As previously mentioned based on past data golf has not been particularly sensitive to mild recessions.
And for those out there that had been looking for a post COVID-19 reversion in golf participation.
I think that we would all have to agree that there is no sign of one in the current data as.
As the game continues to be top of mind for what appears to be a sustainably larger audience with a resulting play levels remaining elevated.
And as we look into the future we have to keep in mind the positive long term impact of the new structural growth now embedded in the modern golf ecosystem.
Our new venues alone should add three to 4 million new off course golf participants each year.
Turning now to our active lifestyle segment. This business met our high expectations in Q1 and is forecast to do so for the full year.
We're seeing continued strong e-commerce sales growth, both from Travis Matthew and Jack Wolfe skin.
Travis Matthew continued to successfully expand its women's launch during Q1 and also Italy also recently introduced active apparel.
Despite more challenging market conditions. This year. This brand is on track for another strong year, both bottom and top line growth.
For Jack Woolskin performance in China outperformed expectations during the quarter and continues to trend positively.
Our business in Europe was challenged by difficult business conditions and high customer inventories.
But still delivered a nice quarter of growth.
Overall, we're pleased with the brand's direction the quality of the products.
And despite uncertainty on market conditions in Europe for the balance of this year, we remain confident in the long term outlook.
Lastly, turning to financial items.
In addition to the success of the business segments over the quarter I want to commend our finance team on the completion of our debt refinancing.
The new capital structure provides increased flexibility and a lower long term cost of capital.
It also simplifies and strengthens our capital structure, while maintaining modest net leverage and increasing our liquidity by over $300 million.
I am no financial expert, but I am certain the combination of less financial risk increased flexibility and a lower cost of capital has to be a good thing.
In conclusion.
We remain confident that the modern golf ecosystem will grow again this year and.
And we remain excited about the direction of our business.
In the near term, we're increasingly confident in our ability to hit our 2023 expectations.
Including transitioning to positive free cash flow this year.
And then further EBITDA as well as EPS growth going forward.
With this increased confidence in 2023, and the higher venue economic expectations announced today.
Our confidence in delivering on.
We're exceeding our previously announced long term economic targets.
As of course also increased.
And now I'll turn the call to Brian to provide more detail on our financials and outlook.
Thank you chip and good afternoon, everyone.
As chip mentioned 2023 is off to a strong start and we are very pleased with our first quarter results.
Demand remains healthy inventories are receding and our debt refinancing with very successful putting us in a good liquidity position with funded debt level levels at approximately two three times.
And even more importantly, the long term profitability of and the corresponding shareholder value creation opportunity related to the top golf business.
Turning out to be even more successful than we expected.
Let's now turn to our results.
Our first quarter results include net revenue of 1.1 dollars 6 billion.
Year over year increase of 12% or 15% on a constant currency basis.
Led by 11% same venue sales growth, a top golf and a 28% increase in active lifestyle revenue.
We achieved this sales growth despite a $29 million negative impact from changes in foreign currency exchange rates, and an $80 million to $100 million filling at retail in the golf equipment business that occurred during the first half of 2022.
In the first quarter non-GAAP operating income was $91 million, increasing over 2% on a constant currency basis were down 14% currency impacted.
We are pleased with this performance given the tough year over year comparison for the golf equipment business as we anniversary the post Covid retail channel fill in during the first half of 2022.
<unk> and labor and marketing, we made into the top golf business, which I will touch on further in a minute.
Net.
<unk> decreased $37 7 million on a non-GAAP basis, which is ahead of plan.
This decrease includes an $18 $6 million increase in interest expense related to higher interest rates and increased interest related to new top golf venues.
$17 $3 million of negative foreign currency translation.
As well as a $7 $2 million decrease in other income net hedge gains.
Lastly, Q1, adjusted EBITDA was $157 million up.
Up 3% on a constant currency basis are down 7% currency impacted.
The result was ahead of the guidance, we provided with our Q4 earnings with the outperformance largely attributable to the successful paradigm launch improved supply and increased venue profitability of top golf.
Now turning to our segment performance.
In Q1, 2023 top golf contributed $404 million in revenue a year over year increase of 25% or 26% on a constant currency basis.
Driven by both strong same venue sales growth and better than expected performance in the non comp newly opened venues.
Top golf segment operating income decreased $3 $7 million or 132 basis points of operating margin due to the planned increase in expenses, we discussed last quarter, including marketing expenses related to top golf, New marketing awareness campaign and the full impact of the investments in labor in the second half of two.
Thousand 22.
Combined these investments added over 300 basis points of headwind in the quarter <unk>.
The underlying profitability of this business remains strong without the impact of these targeted investments on the seasonally low first quarter operating margin would have increased nicely.
Adjusted EBIT for top golf was $48 million up approximately $6 million compared to Q1, 2022, and our guidance due to outperformance in the venue business.
Golf equipment generated $444 million in revenue down 5% over Q1, 2022, or just over 1% on a constant currency basis.
This was a better than planned result, given the retail channel fill and I previously mentioned.
Segment operating income decreased 19% to $82 million versus Q1, 2022, primarily due to foreign exchange rate impacts.
Constant currency gross margin also grew up 140 basis points in the quarter with pricing and decreased freight expenses more than offsetting other inflationary pressures.
Lastly, our active lifestyle segment revenue for the quarter was $320 million up 28% or 32% on a constant currency basis year over year.
Segment operating income increased 40% to $37 million.
This increase was led by strong performance of the Travis Matthew and Jack Wolfcamp brands, and favorable freight costs, which more than offset unfavorable foreign exchange rate impacts and inflation.
As we turn to the balance sheet I'd like to highlight the debt refinancing we completed in March.
Overall, the transactions added over $300 million of additional liquidity reduced our cost of debt and.
And extended the maturities of our credit facilities, thereby simplifying and strengthening our capital structure.
While we have some increased debt and interest expense in the short term related to the upsizing of the term loan.
Additional liquidity gives us flexibility on how to finance top golf venues and therefore over the long term the amount of incremental debt and interest expense should be the same or lower than if we had not upsize the term loan.
More specifically, we entered into a new $1 billion to $5 billion seven year senior secured term loan b.
A large portion of the proceeds were used to refinance both the Callaway and top golf term loan b and the top cop revolving credit facility.
All of which had been paid off and no longer exists.
We use the balance of the proceeds to pay down our ABL facility.
We also upsized and extended the existing top golf calorie brands $400 million ABL with a new five year $525 million senior secured ABL revolving credit facility.
For the debt we replaced as part of the refinance the payback was under two years and generated go forward cash savings of over $12 million per year.
Those savings are being offset by the additional liquidity, we added causing interest expense to be higher in 2023 than what we assumed for guidance in our Q4 earnings call.
Moving to the balance sheet as of March 31, 2023 available liquidity, which is comprised of cash on hand, and availability under our credit facilities with $626 million compared.
Compared to $576 million at March 31, 2022, and $415 million at December 31, 2022.
At quarter end, we had total net debt of $2 210 billion.
Excluding the convertible debt of approximately $258 million compared to $145 $7 billion at the end of Q1 2022.
This increase relates primarily to incremental new venue financing and replenishment of working capital for the non top golf business.
Our net debt leverage was excludes the convertible note was a better than expected four one times at March 31 2023.
Compared to 3.0 times the prior year.
The year over year increase was due to the new venue development and increases in working capital.
We expect a new debt leverage ratio will increase slightly in Q2, and then decrease in the second half as the business generates free cash flow.
Consolidated net accounts receivable was $455 million as of March 31, 2023.
Compared to $413 million at the end of Q1 2022.
Non top golf Dsos were approximately flat year over year.
Our inventory balance increased to $930 million at the end of the first quarter of 2023 compared to $552 million at March 31, 2022, but down from our December 31, 2022 balance of $959 million.
We're still on track to be at more normal levels of inventory by the end of the year.
The strong start to the golf equipment segment and continued momentum of the active lifestyle segment gives us increased confidence in this.
Quality of the inventory is good as older inventory was generally and cleaned up during the pandemic.
Capital expenditures for the first quarter was $70 million net of venue financing reimbursements.
This includes $51 million related to top golf.
For full year 2023, we expect total company capex of $270 million, including $190 million from top golf, which is net of venue financing reimbursements.
Now turning to our balance of the year outlook, we are increasing the midpoint of our full year 2023 revenue guidance, resulting in a new range of $4 42 billion to.
Two for $4 7 billion and increasing the midpoint of our adjusted EBITDA guidance, resulting in a new range of $625 million to $640 million.
We are also increasing the top golf adjusted EBITDA outlook to $315 million to $325 million to reflect the increased profitability at the venues even with a slight decrease in same venue sales expectations.
For the second quarter 2023, we estimate revenue to be within the range of $1 75 billion and $1 195 billion up from Q2, 2020 Two's reported $1 1 billion.
We expect top golf segment revenue to be within the range of $475 million to $485 million.
With same venue sales growth of flat to up 4% and continued strong performance at the non comp new venues.
As a reminder, Q2 2022 was a strong quarter for top golf, given the pent up demand amid omicron related shutdowns in Q1 last year.
We estimate Q2, adjusted EBITDA to be within the range of $195 million to $205 million.
Slightly down from Q2, 2022, which assumes a Q2 adjusted EBITDA for the top golf segment to be within the range of $87 million to $93 million up slightly compared to last year.
Like the first quarter second quarter year over year comparisons will be impacted by the 2022 retail channel filling in the golf equipment segment and the investments in top golf Labor and marketing expenses I mentioned earlier.
The skewed year over year comparison should moderate in the second half.
Overall, we feel good about our business, while we are cognizant of the macroeconomic uncertainty around the world. The fundamentals of our business remains strong top golf venue development and same venue sales growth will remain robust we are not seeing a reversion in golf our active lifestyle business was up significantly for the first quarter and top.
For the total company are on track to be free cash flow positive well ahead of our forecast at the time of the merger.
Finally, and most importantly, we are well on our way to achieving the increased venue profitability targets chip mentioned earlier.
Achieving these new target should result in a higher enterprise valuation over the long term.
That concludes our prepared remarks today, we will now open the call for questions operator over to you.
We will now begin the question and answer session to ask a question you May Press Star then one on a touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the keys. That's at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Also please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble our roster.
Yes.
Alright first question comes from Daniel <unk> with Stephens. Please go ahead.
Good evening, everybody. Thanks for taking my questions.
So I wanted to start on the golf equipment segment, obviously your commentary around paradigm seems encouraging but I do think the call data Tech data I think retail sell out with a little bit weaker in the first quarter. I guess can you talk about any feedback from the channel how are inventories positioning heading into <unk> and maybe you could you reconcile that with the little.
Later, <unk> profitability outlook on the core golf side.
Is that due to any weaker retail data youre seeing kind of can talk to the <unk> guide down a little bit would be great.
Okay.
Sure Daniel in terms of the.
The start to the year in the market.
You are correct it was a little.
Slower than what we had initially expected which was flat to down slightly.
But not too far from that either so.
The Big news there is that that participation is hanging in there very strongly in that.
The business appears really solid from our perspective, and then on top of that we have good momentum in our brand and in the paradigm line of clubs specifically inventories.
Inventories as we've.
Talked about now for some.
Some period of time have caught back up to more normalized levels.
And there are certainly there now.
We're not they're not particularly high or particularly but they're no longer low.
Low out there so much.
Much more of a more normalized operating environment there.
And then in terms of.
The last.
Western Daniel was really around the profitability of the I think what you said was the golf equipment.
Legacy business relative to Q2 and.
And we don't really provide any guidance.
Specific to segment other than the top golf segment on a quarterly basis, but we.
We've been very pleased with the profitability of the golf equipment business, our margins are remaining strong and our.
Candidly trending to be up on a year over year basis and.
We feel good about our position in that that segment as well as the others.
And Andrew just remember in Q2, Youll still be lapping the retail channel fill in from last year, a little bit and currency will have a little bit of a negative impact on that business.
Okay. Thanks for thanks for that color and then maybe I'll follow up just on top of I think the same venue sales continued to impress up 11%. If I remember right last year you guys are working on a technology bring down wait times and drive the utilization any update there or any quantifiable benefits and is that what's driving the uptick in site level profitability or could you provide more.
Color on that.
<unk> initiatives oriented team has succeeded with on driving that that level of productivity.
Yes, so the biggest <unk>.
The metric that we highlight is that pie initiatives. So.
And that's really a digital reservation strategy that.
And that has broad based improvement in the business. It's not the only thing that the team is working on so.
The team's been doing just.
Great work across broad spectrums on pricing.
The labor utilization cost of goods sold the optimum is Asian et cetera, but this digital strategy around Pi.
That we're rolling out now we have 36 venues as of the end of Q1.
Is showing great promise and we see same venue sales growth as well as improved.
Operating efficiencies and the venues when we put that in.
As we ramp that throughout this year.
We are expecting further positive benefits from that.
And then any quantification on the type of throughput uplift so far on those 36 sites.
Quantification enough for us to raise our overall <unk>.
<unk> economic targets, along the way that we just.
Articulated Daniel so.
10% improvement in our target venue unit economics and a.
Relative to what we provided in 'twenty, one and 21% higher.
Then at the time of the merger.
Great well, thanks, so much for all the color and best of luck.
Thank you.
The next question comes from Randall <unk> with Jefferies. Please go ahead.
Yes, thanks, guys back on the top golf site level.
<unk> ability uplift.
Or that you think is coming from just better out of the box or out of the gates performance on kind of revenue production from the non comping units as the awareness is going up as you tend to find some of the units insurance market.
We're starting to happen underway and then how much of it is also a function of.
You previously thought the maturity level from a revenue perspective would be X and now it seems like it's.
It's why meeting a higher mature level of maturity level.
Revenue. So can you give us some perspective just both on.
Let's say, new and mature where youre just it seems like a driving better than expected revenues faster.
New and then just higher revenues on the mature level.
Unit.
Okay.
Yes, Randy.
Yes.
Really all of those things so what we're seeing at top golf in it we have seen now for an extended period of time is.
Just a steady drumbeat of improved operating efficiencies.
The new venues.
Opened.
Very strongly and consistently over the last.
Year, and a half two years.
So our confidence in those venues as.
It has increased.
And we're doing that in big coastal markets and we're doing it in small.
<unk> markets in the center of the country.
So we are obviously feeling very good about that but.
Fundamental operating improvements that we're talking about with Pi and labor efficiency in cost of goods sold that are driving these.
Higher venue economics, and also giving us more confidence on driving long term same venue sales growth.
That's not specific to new venues or venue.
And then use of any particular tight.
We're seeing it broadly and.
As mentioned, we believe it's a significant change that we're now comfortable baking into expectations and.
Highly confident that we have a sustainable change there.
And then any other more specifics around lastly around.
No.
Progress on top tracer.
Installs and then anything that you can flush out between the sales performance of Jacksonville skin versus Travis Matthew growth in.
In the quarter. So I don't recall you didn't have the exact numbers. Thanks.
Yes.
So on Jack Welch going to Travis Matthew They both had phenomenal quarter is up.
Double digit.
Growth and.
So.
Really equally positive quarters.
For those two brands.
And then on top tracer, we're really seeing more of the same in terms of what we've seen.
The ranges that put in top tracer continue to have rave reviews. They continue to have great economics.
Very fast economic paybacks on that.
We've been ramping our capabilities there in terms of installation and the sales infrastructure we were very.
Excited about our partnership with the PGA of America.
We're working on a new coaching platform that will be.
Partnering with them on and that will be coming out later, this year, which will allow us to really make the product more embedded and sticky across.
All venues that have access to a.
PGA professional so lots of good things and momentum going on in the top tracer business and.
As well as many of our businesses right now.
Helpful. Thanks, guys.
Thank you.
Our next question comes from Alex Perry with Bank of.
Erica Please go ahead.
Hi, Thanks for taking my questions I think in the guidance your move to golf equivalent versus apparel comp positioned are you still expecting golf equipment to be roughly flat year over year. In 2023, and then also I think FX and the prior guide was a $20 million headwind to EBITDA, what are you sort of it.
Expected now for FX.
Sure Alex on the first one in terms of golf equipment, no no meaningful change.
On our expectations for the category as mentioned are.
The category opened a little bit softer, but not meaningfully so and our performance is a little stronger.
So no no change at this point.
Of the year and then on the FX, Brian do you want to take that one yes, it's still about $50 million revenue for the full year.
Yes.
With revenue.
There will be a headwind in Q2 again and then it gets better in Q3 and Q4.
Perfect and then I guess, just as my follow up.
EBITDA is expected to be down year over year and then.
So the guidance implies a pretty significant acceleration year over year in <unk> EBITDA I guess, maybe could you just lay out the big drivers that caused the acceleration is it mostly just easing comps from the channel refill and then the zero to 4% seem in your sales guidance in the second quarter versus the mid to high single digit comps.
For the full year I.
I guess expected to probably accelerate in the back half to what would be driving that thank you.
Sure.
On the comps.
If you look at the first half and take the total first half.
Generally don't compare against consensus but were right on.
Pretty much right on consensus for that because we had more improved supply and we shipped more in the first quarter and second quarter, but I think for the first half it's about right.
And then in the second half Youre right. It is get easier comps for the labor investments for the marketing expenses are top golf and then the retail channel filling that occurred in the first half last year, so those get easier composite well in the FX gets easier.
And then I'll jump in on the second part of that question, which was I believe related to the same venue sales expectations for Q2.
<unk>.
Why those were lower and then ramp back up.
And I am sure you see this in a lot of the businesses that you are covering now, but theres a lot of noise in the year over year comps by quarter still a lot of this is still post COVID-19.
The Lumpiness if you would of.
When different.
Business has opened up and.
For instance last year in Q1.
The beginning part of the quarter Omicron was still out there a little bit it feels like that was a long time ago, but thats.
That was an impact in the top golf business at that time.
Later in the quarter in Q1 and into Q2.
There was really a little bit of a surge.
And that surge in small events.
And a little bit of a walk in.
Makes that Q2, and Q3 comp the hardest comp that will have for the full year.
I'll give you one metric on that.
Just to give you some perspective and thats social events. So those are small events.
Birthday parties that type of thing generally a two bay activity.
That's been a great piece of new business for us.
But we're forecasting that down slightly in Q2 this year.
But even if it down in Q2, when you look at it on a <unk>.
Two year stack, which is it's going to be up we're looking at are just off of 19, let's put it that way is going to be up 60% to 70%.
So what is down in one quarter is 60, 70% up versus the last time, we didn't have a.
The noise around the post COVID-19 environment.
So thats just the type of thing, we're dealing with on a quarter over quarter basis, our consumer demand is forecast to stay strong.
We have upside from the Pi marketing and other initiatives that will ramp during the year and youre seeing that in our in our guidance.
Perfect. That's really helpful best of luck going forward.
Thank you.
Our next question comes from Michael Swartz with <unk> Securities. Please go ahead.
Hey, everyone. Good evening.
A point of clarification on the on the top golf.
Menu sales guidance that you updated Tonight I think chip you had mentioned that the group and corporate events are are the largest reason at least that you are taking that down a bit but I didn't hear are you expecting the walk in or have you changed your assumption for the walk in in small small group businesses for the year as well.
We have not.
The solo.
Our rationale for the change in the full year forecast is the corporate.
Forecast, we lowered our full year corporate forecast base.
Based on some trends, we saw and what we're hearing which I already articulated.
And are you taking any measures just given the expected softness in that channel.
Taking measures to reduce costs in the near term as well.
As we mentioned we feel very good about our our EBITDA forecasts and.
We also have upside from some of these initiatives that I've mentioned pi or marketing.
The other operational initiatives that are going to ramp through the year.
And we'll obviously keep our eye on the market and develop other contingency plans if needed but.
At the moment, we remain confident on our on our earnings ability coming out of that business in <unk>.
Candidly <unk> seen it.
Operating.
Performance of that business has a is one of steady consistent trend.
Okay. That's helpful. And then just with regards to the new long term return targets that you presented.
Seasoning, maybe give us some context of where you are today with some of those metrics and maybe how you see that ramping over the next three to five years.
Sure.
We're now operating just behind these metrics.
And.
We expect to be able to achieve these metrics in the next.
Year to two at Max.
Okay, great. Thank you.
The next question comes from Joe Al Cabello with Raymond James. Please go ahead.
Thanks, Hey, guys good afternoon.
Let's go back to the top call. It seems like your sales outlook for a second and just to clarify on the softness in corporate events can you remind us how big that.
That piece is in terms of the overall venue revenue, particularly outside of <unk>, because I think that's a big piece.
But I don't think its as big.
Pat.
That's correct.
Biggest in Q4 and.
It's ballpark, 20% of revenues for the full year.
Okay and in terms of the softness youre seeing there.
Particularly geography.
Are you seeing that.
Across the U S.
We're seeing it across the U S.
Really started in in the March time period.
And it's.
Enough that we're adjusting our.
Estimate for the full year down what I think is modestly.
From high single digits to mid to high single digits.
Not enough that we're adjusting any of our EBITDA forecasts.
And also I want to reiterate that I said that I believe we're going to be at or.
Approximately 2019 levels as well so I don't want to give you.
The impression that this fell off a cliff or anything just enough early in the year that.
We wanted to adjust the full year forecast.
Understood. Okay. Thank you.
Thank you.
The next question comes from George Kelly with Roth.
Please go ahead.
Hey, everybody thanks for taking my questions.
So two for you.
The first one on your balance sheet.
I think you said in your prepared remarks that you expect.
<unk> leverage ratio.
Decline in the back half of this year. So I was just curious if you could specify where you expect it to end the year and then following this year how quickly should you de lever.
Okay.
George we do expect to just pick up a slight bit in Q2.
We added another venue for top golf in Q1, but as the year goes on.
We'll delever a little bit there and the leverage should come down.
Sure.
Okay.
Yeah.
Yes in the three and a half range.
Could be a little more or less but five year round there from the <unk>.
I mean, the $4 one.
Okay.
And then can you can you talk about post 2023 like what should this look like in 'twenty four 'twenty five not to be too specific but I assume it will continue you'll continue to delever.
Yes, we will as we generate cash flow. This year and then we're going to generate more cash flow next year. This this kind of delever pretty quickly and a lot of improve but we're not going to give a specific <unk>.
Forecast right George this is all.
The transition to.
Free cash flow positive has a lot of ancillary benefits for.
For the business and Youre identifying one of them.
Excellent and then second question for me.
A lot of moving parts just with respect.
Top golf in this margin updated margin forecast in golf equipment et cetera. So just curious if you still feel comfortable with the longer term plan to 2025 plan of $800 million of EBITDA.
Yes, not only comfortable as I've mentioned, we have increased confidence in it.
The.
When we gave the targets.
Our 2025, we were operating under the guise of lower venue unit economic.
Performance at top golf so.
Increased confidence or meeting or even beating that 2025 target.
Okay excellent. Thank you.
Next question comes from Eric Wold with B Riley Securities. Please go ahead.
Thanks.
Good afternoon.
You talked about one of the one of the reasons why you're more confident in the top golf business being the Pi platform implementation.
Our efficiency <unk> reservation system kind of flowing through remind us does that also include.
Dynamic pricing debate or is that something separate and if it is included.
Talk about what you've seen so far with the tests that in terms of.
Maybe a range from a baseline that consumers are kind of willing to accept.
Sure Eric It does include that.
Is embedded in there some dynamic pricing so we can.
Effectively pie gives us the ability to do reservations more effectively and plan, our labor more efficiently et cetera.
And we're able to.
Therefore experiment with different pricing levels for some of those reservations in peak times et cetera.
We're not going to get into the.
Relative price sensitivity and et cetera that we've gone through and some of the models of that.
But I can.
Tell you from what we've seen thus far the consumers pretty engaged in we're not seeing that.
The consumer being especially price sensitive we've taken price at both.
The game and food and beverage multiple times.
And.
At the same venue sales growth has continued to.
Move very positively.
And when were.
Charging if we might for a.
Reservation at a peak time or at a peak floor et cetera, giving the consumer that option is a tried and true approach that appears to have upside in would be.
We believe beneficial to the consumer.
Got it thank you very much.
Our next question comes from Noah <unk>.
Ken.
Keybanc capital markets. Please go ahead.
Hi, Thanks for taking my questions not to put too fine of a point on it but as it relates to the same venue sales guide how should we think about the cadence of the rollout of pie moving through the year any opportunity to kind of pull that forward in terms of in terms of benefiting the base more quickly.
And then just one on the apparel side obviously.
Retail channel continues to be fairly challenged so how are you feeling about the promotional environment there.
As well as the inventory position at Travis Matthew Thank you.
Sure. Okay. So the first one.
If you know going back we had 18.
Venues with pie at the end of.
Last year.
We're at 36 now so we installed 18 during the quarter.
That would be if we do that going forward that would put us right at.
All U S venues by the end of the year.
We'll obviously go as quickly as we can but that cadence is a reasonable cadence and this is another one of those things we want to do it right, we'd like to do it fast, but you better do it right and.
So we're pleased with that and we will go as quickly as we can.
<unk> already.
Have baked that into our expectations.
On the apparel side.
The apparel inventories in the market are a little bit high in general.
But the brands all have momentum and they've had good quarters and Travis Matthew in particular has.
Good momentum so it's going to be a more normalized promotional environment for the year, but we have high confidence that youre going to see or we're going to see.
Strong growth.
Travis Matthew that had an exceptionally strong quarter.
And we expect it to continue to grow both top and bottom line.
Thank you.
Your next question comes from John D. Karen.
With TD Cowen. Please go ahead.
Great. Thanks for taking my question.
Sure Brian can you talk to the financing needs of top golf, given maybe some of the interest expenses coming in.
Higher than what we had initially anticipated and it looks like landlord financing in the presentation.
You gave is also going to be higher at year end. So how do we think about the overall financing.
Unit growth going forward.
Sure, we typically use refinancing and that remains.
Certainly viable path and we continue to use that we haven't seen.
Pressure in the cap rates, we've been able we have a good relationship with our partners Thats all remained strong.
The financing does though taking the extra besides just giving us more liquidity would be to allow us flexibility in how to finance those venues, whether you do it before or after or some other method. So it really just provides a lot of flexibility to us.
Got it.
Maybe one quick follow up to that is.
Is capex.
Sustainable at these levels, because thats working capital normalizes.
Your EBITDA continues to grow with Capex were to stay at these levels there would be a lot of free cash flow just curious.
Is this the new run rate of Capex going forward.
It's pretty close.
Probably just a few.
A few million dollars lighter than we would probably guess on average just due to timing of venue financing, but you are talking about 190 versus 200. So it's all right in the ballpark and the cowboy.
Cowboys side is about right. So you will see you will see the cash flow developed.
Developed from this.
Got it. So this is kind of the capex needs going forward for the business as we go into 2024 and beyond.
Yes, okay.
Okay got it thank you.
Yes.
Our next question comes from Casey Alexander with Compass Point Research and trading. Please go ahead.
Yeah. Most of my questions have been answered, but I do have one here.
EBITDA margins seem to continue to improve bit by bit to what extent.
Would you say.
<unk> of supply chain difficulties is positively impacting margins this year and what can we expect from that on a comparative basis as the year proceeds.
Well Casey.
<unk>.
You are right I mean, our EBITDA margins have continued to improve.
Candidly the underlying operating economics at each of the segments is continuing to improve if you look over any reasonable period of time.
And catching up on the supply chain, although it creates some noise in the timing perspective.
<unk>.
Also creates.
More upside because it's going to mean lower freight costs and.
Some other improved operating efficiencies going forward.
The most.
Most of that now we caught up.
<unk>.
Mostly during last year. So we've been now caught up for a while but we're now starting to realize.
The benefits of freight and.
Some of the other efficiencies that will come with that and Youll see that really run through the P&L as.
As we go through the year.
Yes. My second question is that most of the geographies had pretty strong year over year comps in the first quarter, except for Asia is there is there any color that you have regarding that specific market and how you expect that to run out the rest of the year.
That was just FX Casey so all the <unk>.
The yen and the Korean won were the two currencies that were most impacted and.
Yeah.
They had a very strong first quarter and Japan, specifically, our market share looks good no real.
Distinctions between the Asia market in the U S market in terms of.
Strength of the market at this point.
Casey Asia was up 11, 6% revenue in constant currency.
Okay Alright, great.
Thanks.
This concludes our question and answer session I would like to turn the conference back over to chip Brewer for any closing remarks.
Yes, I want to thank everybody for tuning in today and in particular I want to thank the top golf Callaway brands employees associates, the playmakers and the venues are advocates and customers for your support looking.
Looking forward to a strong Q2 and.
I look forward to speaking with everybody again in August .
Yes.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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