Q2 2023 Topgolf Callaway Brands Corp Earnings Call
[music].
To the top golf Calloway, Brian second corner, 20th 20th three earnings Conference call, all participants will be and listen only mode. So.
So did you need assistance. Please signal conference specialist by pressing the Starkey followed by zero.
After today's presentation there'll be an opportunity to ask questions. Please.
That is being recorded I would now like to turn the conference over to Katina <unk>, Vice President of Investor Relations and corporate Communications. Please go ahead.
Thank you operator, and good afternoon, everyone welcome to top golf Calloway brand second quarter of 2023 earnings Conference call I'm contained <unk>, the company's vice President of Investor Relations and corporate Communications Joy.
Joining me of seekers on today's call a chip Brewer, our president and Chief Executive Officer, and Brian Lynch, Our Chief Financial Officer, and Chief Legal Officer.
Earlier today, the company issued a press release announcing its second quarter of 2023 financial results. In addition, there was a presentation that accompanies today's 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 Relations website under the financial results tap.
Most of the financial numbers reported and discussed on today's call are based on U S. Generally accepted accounting principles in the instances, 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 that this call will include forward looking statements that involve risks and uncertainties that could cause actual results to differ material from management.
[noise] differ materially from management current expectation, we encourage you to review the Safe Harbor statements contained in the presentation and the press release for a more complete description and.
And with that I'd now like to turn the call over to Chipper.
Katrina and welcome to the team.
Good afternoon to everyone on the call and thank you for joining us today.
Two two was a solid quarter for Topgolf Calloway branch driven by strength across all our business segments.
At the halfway point of 2023 here are just the highlights what we see.
Market share gains in brand grows in golf equipment.
A stronger economic model and proven growth algorithm and the top golf venue business.
And continued growth in our apparel assets.
We also see a resilient and engaged consumer across all of our businesses.
We remain on track to deliver strongly but dog growth for the full year.
And a transition to being cash flow positive.
Both of the corporate level as well as at top golf individually.
This transition to being cash flow positive is an important milestone for our business and we're confident it will ramp from here.
Having said this we also recognize that there is more quarterly noise in our results and it would be ideal.
Most significantly last year's retail inventory catch up in our golf equipment business and.
Separately the post COVID-19 surge in the events business the top golf make year over year quarterly comparisons difficult and cloud the true progress, we're making and improving the fundamental economic engine of our business.
And our comments today, we hope to clearly explain the short term volatility.
As well as highlight the longterm positive story of continued improvement in the earnings power of our business and the resilience of our core modern golf consumers.
With that said, let's shift gears and talk about the business segments.
We'll start by discussing top golf.
This is a business, which is expected to add three to 4 million new off course golf participants each year for every 11, new venues and thus will help drive growth across the entire modern golf ecosystem.
With this growth.
Top golf will soon have more consumers visiting it than exist in all of U S on course golf.
Including one half of the total encores golf population as many now participate in both on and off course golf.
And what is truly a synergistic relationship.
Topgolf sister brands at our company will be helping drive this growth.
And also have a competitive advantage and reach all these modern golf consumers.
As outlined by Artie It is June 1st Fireside chat.
There are three key performance drivers for our top golf than new business.
First is our development pipeline set.
Second is the same venues sales growth and third is the venue margin expansion.
Walk through each one.
Starting with our development pipeline this quarter, we successfully opened two new venues.
King of Prussia, Pennsylvania in Saint Petersburg, Florida.
Both of which drove excitement and brand heat in those regions.
We're pleased to report that our new venues continue to perform extremely well.
And then we remain on track to open 11, new owned and operated venues in 2023 in line with our guidance.
Turning to our second performance drivers same venue sales.
As expected Topgolf posted seventh consecutive quarter of same venue sales growth.
Despite challenges from temporary venue shutdowns from air pollution caused by the fires in Canada.
Same venue sales for the quarter was within our guidance range at approximately 1%.
And the two year stack, which takes out some of the post COVID-19 related volatility shows and even more impressive 9% growth.
As we discussed last quarter, we fully expected to to to be challenging from a cop perspective as last year's same venue sales benefited from a post COVID-19 surge in the events business.
That said, we are maintaining our same venue sales guidance for the full year based on the continued strength in the consumer portion of our business.
Along with new initiatives that will ramp during the second half and some nuances in the quarterly comparisons.
Let me give you more detail on each of these and walk you through how we get to this conclusion.
First and most importantly, we have seen consistent and strong growth in the consumer led portion of our business.
This category represents the lion's share of our business and we believe it is the best indicator of brand heat.
Second as of Q2, we have made continued progress on our digital journey, including reservations.
In fact U S venue digital sales penetration increased eight points versus last year or two or approximately 34%.
The largest driver of this growth is our digital inventory management system Pie, which has now been rolled out to over half of our venues.
This system allows us to maximize sales improve the customer experience and optimize costs.
And we continue to expect to have all venues on pie by the end of the year.
More specifically to this section of our call on an individual venue basis. It helps drive approximately two point increase in the same venue sales post implementation.
And given the timing of the rollout we estimate it will add at least 1% to same new sales in Q4.
Third we have in our taking incremental pricing both in game play and food and beverage.
Based on our experience as well as competitive positioning we believe this will have at least a 1% positive impact on <unk> sales primarily in Q4.
Fourth we're excited about our new innovative marketing campaign, which will launch later this month. It is designed to both captivate an appeal to the modern golfer ended drive both incremental awareness and visits.
I'm not going to ruin the surprise by trying to describe it to you on this call, but I'm sure you'll notice it and I hope it makes you smile.
Lastly, we believe our second half comp will be slightly less challenging than our queue to comp.
This is because we expect the lap of last year is especially strong events business to be somewhat less of a headwind for the second half of the year.
And last year's Q for comp was negatively impacted by approximately two points.
By venue closures due to extreme cold weather, which we don't expect to repeat this year.
Moving onto our third performance driver venue margin expansion.
Cogs in labor optimization, along with continued leverage of fixed overhead costs drove sequential quarter over quarter improvement in our queue to adjusted EBITDA margins.
This in turn drove total segment EBITDA towards the high end of our range. Despite <unk> same venue sales coming in towards the low end.
This is just a fantastic story and it highlights how our venues are becoming increasingly profitable.
Pi continues to be a key ingredient to our venue margin expansion.
It does so by facilitating increase reservations, which in turn support more predictable labor scheduling an increase bag utilization.
As mentioned at the end of Q2 more than half of our venues had implemented pie and we expect to have all venues utilizing pie by the end of the year.
The top golfs teams excellent work over the last few years puts us well ahead of the plan laid out at the time of the merger.
And in a strong position to achieve the updated target venue you'd economics, we provided last quarter, including approximately 35% for wall adjusted EBITDA margins too.
Two and a half year payback period.
A 20% return on gross investment.
And 50% to 60% cash on cash returns.
Together these targets represented a fundamental long term improvement in the cash generation and profitability of our venue business.
In essence, a step change in value.
Lastly, turning to top tracer.
I want to quickly highlight his success in the quarter and continued dominant leadership position as golf number one range technology.
We continue to see healthy demand for this product with accelerating bay installations verse skew one and.
And we are on track to install at least 7000 bays. This year in line with our guidance.
Moving to our golf equipment segment, and another example of strong execution.
We delivered improved use market share performance in the second quarter and what has been an excellent year to date for our brand and both tour exposure and product performance.
In June we saw use market share gains in every category in both the on and off course channels.
For both the month of June and year to date or brand is number one in drivers very woods hybrids total woods and irons.
We're also a number two and putters in golf ball with strong shares in these categories as well.
This performance shows the continued strength of our brand and our products.
Our paradigm line of clubs, which launched in Q1 was the primary driver of this success.
Paradise had continued strong demand throughout Q2 and has been exceptional onto our all year with a paradigm driver winning an impressive nine times on the PGA tour year to date.
Not surprisingly paradigm is the number one selling driver in February model year to date in the U S.
I'm proud of these results and I believe our performance. This year has further strengthened our brand.
This in turn will benefit our shareholders not only this year, but going forward.
In other brand news just last month, we announced the extension of our long term partnership with Masters champion John ROM <unk>.
John will continue to play both Calloway, an odyssey equipment.
We're calloway, headwear, travismathew apparel, and footwear and champion Topgolf business, including the top Golfed logo on the side of his head where.
This is another wonderful example of how we are achieving synergies across our brands.
Looking at the overall golf industry and the health of the game. The U S hard goods market continues to hold up quite well down just 1.6% junior year to date consistent with our expectations.
In addition, all signs point to golf participation remaining robust with U S rounds played up 5.5% through June year over year and strong demand for consumables in the quarter.
Looking ahead, our leadership position in R&D investment and more specifically our expertise in the use of AI and the development of product gives.
Gives me continued confidence in our current and future product pipeline.
Turning that active lifestyle <unk>.
Travismathew had double digit growth again this quarter. The brand continues to successfully open new retail stores, including five year to date and totaling 46 overall.
The team also continues to do a tremendous job executing the new women's category expansion.
Which has now grown to become a mid single digit percent of overall sales and early sign of success.
[noise] Travismathew also continues to find exciting ways to grow its brand in the modern golf ecosystem include.
Including building additional synergies across our brands.
In June the brand had a very successful marketing activation event at the ACC Golf tournament in Lake Tahoe.
This high profile event drew participation from several travismathew ambassadors as well as Calloway brand ambassadors Steph Curry.
Who went on to win the event via dramatic walk off Eagle finish.
Both Calloway, and Travismathew, including New Travismathew brand Ambassador Reggie Bush also participated at top Golf's U S open event at El Segundo.
We feel incredibly proud to partner with ambassadors, who share our excitement about the growing modern golf ecosystem and.
And our teams are increasingly enjoying opportunities to leverage crossed brand synergies.
Moving along Jack Wilson had a good first half despite choppy Mac backdrop in Europe as well as earlier shipment timing this year versus last year, a supply chain corrected.
Jack Woolskin remains on track for steady growth in both revenue and profits for 2023.
In conclusion, we're excited about the strategic direction of our portfolio of global brands and the growing modern golf ecosystem.
In the near term our brands are strengthening and we remain on track to deliver impressive EBITDA growth and transition of positive free cash flow this year.
This inflection point is just the first step in what will be a strong long duration story of overall growth in both EBITDA and cash flow.
As we do this our top capital allocation priority continues to be investing in the profitable growth of our business, most notably in new venues.
This is an area, where we have demonstrated strong competency in selecting building opening and operating these unique in high performing assets are.
Our top golf venues are delivering increasingly attractive returns and we have a high degree of confidence in their performance both out of the gate.
And over time.
Looking forward, we remain excited and optimistic about our business, which benefits from a defined leadership position in modern golf.
Synergies across our portfolio premium brands and.
And a clear path to continued profitable growth.
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.
We are pleased with our queue to results, which showed strength across each of our segments and progress against each of the key topped outperformance drivers chip discussed <unk>.
Including continued development of 11, new venues this year.
Seven consecutive quarters at the same venue sales growth and.
And good progress toward our venue margin expansion goals.
This progress together with continued high consumer demand for Orange and of course Scott.
Receding inventory levels and improve liquidity puts us in a strong position to deliver positive free cash flow this year.
To meet or exceed our long term financial targets.
Now, let's turn toward our second quarter financial results.
Second quarter net revenue was $1.2 billion, an increase of five 7% year over year or six 5% on a constant currency basis.
Which was in line with our guidance.
This increase was led by top class robust, 6% year over year revenue growth.
We achieve this result, despite an 8 million dollar negative impact from changes in foreign currency exchange rates and.
In the post COVID-19 inventory filling in retail and our products businesses, which primarily impacted the first half of 2022.
Q2, non-GAAP operating income was $135 million.
Approximately 3% and flat on a constant currency basis year over year.
We are pleased with his performance considering both through challenging lap with the inventory filling in retail and our products businesses as.
As well as the planned investments and labor marketing, we made it into the top craft business.
Q2, non non-GAAP net income was $77 $8 million, a decrease of $15.7 million compared to Q2 2022.
The decreases attributable to $23 million increase in interest expense.
Primarily due to higher interest rates and additional term loan that related to a recent debt refinancing.
Lastly, queue to adjusted EBITDA was ahead of our guidance range at $206 $2 million down 5% compared to last year, primarily due to unfavorable changes in foreign currency rates.
Due to adjusted EBITDA increased 2% on a constant currency basis.
Driven primarily by operational efficiencies.
Now, let's turn to our segment performance.
The second quarter, Topgolf revenue increased $67 $1 million to $471 million a year over year increase of 16.6%.
Driven by the addition of 11, new venues and approximately 1%, saying they new sales growth.
Which was within our guidance range.
We estimate that the impact from temporary venue shutdowns caused by fires in Canada was worth about a point of same venue sales.
We believe it is helpful to compare the same venue sales and a two year stack basis.
Because it removes some of the Kobe related volatility and demonstrates the strength of our venue business.
When a two year stack basis same venue sales growth for Q2 was 9%.
By comparison in Q1, 2023, 70, new sales is 11% and a two year stacked basis was 14%.
Stopgap segment operating income was $44 million, which was largely flat versus last year.
As mentioned previously this result in large part reflects the plan to increase and marketing expenses related to top cups come play around marketing campaign and investments in labor, we made in Q3 of 2022.
Importantly, the underlying earnings power of this business continues to increase.
And we remain on track to achieve our four walls adjusted EBITDA margin target of 35% by 2025, if not sooner.
<unk> adjusted EBITDA was $92 million up approximately $6 million compared to the queue to.
Last year.
And at the high end of our guidance range due to solid performance that our new venues and improved operational efficiencies that existing venue.
Capital equipment net revenue was $451 billion flat year over year and up 1% in constant currency.
This was a good performance considering the previously mentioned retail channel filling last year.
Unfavorable changes in foreign currency rates.
These headwinds were largely offset by our increased market share gains in golf clubs strong golf ball sails and continued strength and overall rounds played.
Golf equipment segment operating income was $96 $4 million, a 3.9% decline versus Q2 2022, primarily due to unfavorable changes in foreign currency exchange rates.
This result, partly offset by stronger gross margins, which increased approximately 100 basis points year over year.
Increased pricing and lower free class.
Lastly, Q2 active lifestyle segment revenue was $258 million slightly.
Slightly down or flat on a constant currency basis as compared to Q2 2022.
This result was in large part due to a shift and timing of wholesale wholesale shipments between Q1 and Q2 as compared to 2022.
This is evident in our first half results were active lifestyle revenue increased 13.3% year over year.
Due to active lifestyle operating income of $19.5 million decreased $3 million versus Q2 2022 due to plant operating expenditures to support growth that was partially offset by gross margin increases related to price increases at a higher mix of direct to consumer business.
Moving to our balance sheet.
As a reminder, we completed a significant debt refinancing of March of this year, which added approximately $300 million of additional liquidity reduced our cost of the refinance debt and extended maturities of our credit facilities.
We've had only simplified and strengthen our capital structure, but also gave ourselves flexibility ability on how to finance topgolf venues.
Including self financing, which provides us with another option is we decide how to finance future venues.
As of June 30th 2023 available liquidity, which is comprised of cash on hand, and availability under our credit facilities was $648 million compared to $415 million at December 31, 2022.
And as compared to $640 million at June 30th 2022.
At quarter, and we had total net debt of $2.24 billion, which excludes convertible debt of approximately $258 million <unk>.
Compared to $144 billion at the end of Q2 2022.
This increase related primarily to incremental new venue financing.
The additional $300 million, a term loan debt and normalization of working capital for the non talked about business.
Our net debt leverage which excludes the convertible that was four one times at June 30th 2023 compared to two seven times at June 30th 2022.
The year over year increase was due to a new venue development and increases in working capital.
Our net debt leverage ratio was in line with March 31, 2023, which is a little better than we discussed last quarter.
We continue to expect our leverage to decline in the back half of the year as we generated free cash flow.
Consolidated net accounts receivables $397 million compared to $376 million at the end of Q2 2022.
Non-profit off days sales outstanding increase slightly from 55% to 58 days.
Our inventory balanced increase to $840 million compared to $640 million at June 30th 2022, and is down from our December 31, 2022 balance of $959 million.
The teams active inventory management has led to a reduction of $119 million in the first half of 2023.
Continued momentum and or golf equipment inactive lifestyle segments gives us confidence.
We remain on track to be at more normal levels of inventory by the end of the year.
More importantly, we feel good about the quality of our inventory is much older inventory was cleaned up during the pandemic.
Gross capital expenditures were approximately $263 million for the first six months of 2023 compared to $243 million for the first six months of 2022.
Net capital expenditures, which net out the proceeds from construction reimbursements.
We're $148 million and $154 million in the first six months of 2023 and 2022, respectively.
For full year 2023, we expect total company net capital expenditures of $270 million, which includes $190 million from Kafka.
Before moving to our outlook I want to comment on a few other matters.
Versus the form 8-K, we filed yesterday.
Last week, we identified unusual it system activity and immediately took proactive steps in consultation with our advisers to secure our systems.
Reactivated are incident response planning a move portions of our network offline as a precautionary measure.
The majority of our systems are back online and full access is expected to be restored in the coming days.
Based on what we know now we do not believe the incident will have a material effect on our business operations or financial results.
Second during the quarter, we repurchase 1 million shares an open market transactions for a total cost of $17.8 million.
Finally, I went to provide a brief update on when our relationship with full swing the owners of the swing Sweet indoor golf simulation technology that delivers golf ball tracking data and measures ball flight indoors.
On August 1st 2023, we acquired certain assets of the swing sweet business for approximately $12 million.
This small acquisition of strategically relevant to us.
It allows us to control the use of the top Cup brand in this channel and from a financial perspective. It is immediately cash flow positive in year one.
Now turning to our balance of the year outlook.
We are maintaining our full year 2023 revenue guidance range of $442 billion 244, $7 billion in our adjusted EBITDA range of $625 million to $640 million.
A tough golf, we continued to guide to approximately 1.9 billion in revenue and an adjusted EBITDA range of $315 million to $325 million.
We're also reaffirming same menu sales guidance to be mid to high single digits.
For the quarter.
For the third quarter of 2023, we estimated revenue to be within the range of $1.05 billion.
And 1.0 $75 billion compared to $989 million in Q3 2022.
For top gun, we estimate third quarter same venue sales growth between 1% and 3%, which would represent 12% to 14% growth.
Two year stack basis.
We estimate Q3 consolidated adjusted EBITDA of 141 $254 million, which is slightly ahead of Q3 2022.
Now I would like to provide some additional details you can better understand our second half guidance, including the cadence between Q3 and Q4.
Tough cough second half venues sales growth will be more heavily weighted towards Q4 versus last year for several reasons.
In Q4 2022, there was some unusually severe weather the led to the shutdown of a significant number of our venues negatively impacting semi do sales by approximately two percentage points.
We are assuming that shutdown does not repeat in queue for this year.
Pricing, we're taking <unk> of Q3 should also provide at least a one percentage point lift the same venue sales in Q4 versus Q3.
Our pie initiatives should also provide at least a one percentage point lifts and same into sales in Q4 versus Q3.
Further we expect top cough profitability to improve in the second half a.
A year over year comparisons for marketing and labour become much easier.
And increased pricing and improved operational efficiencies inner venues from pie and other initiatives continue.
Moving to our products businesses, we expect growth in the second half as we will no longer be laughing the retail channel inventory filling in that occurred in the first half last year.
Also our second half golf equipment lunch schedule is more heavily weighted toward Q.
Q for this year as opposed to Q3 last year.
And on a consolidated basis, we expect changes in foreign currency rates and lower freight expense to be tailwinds in the second half of this year, especially in Q4.
Overall, and despite the ongoing macro volatility our business fundamentals remains strong the modern golf consumer remains healthy and engaged we are on track to deliver double digit revenue and EBITDA growth. This year we're.
We're also successfully managing downer inventories.
And our liquidity position as strong and finally, we expect to generate fee free cash flow this year on a consolidated basis.
And in top cough, well ahead of our plan at the time of the merger, which is a significant proof for unlocking shareholder value.
That concludes my prepared remarks for today I will pass it back over to chip for some additional comments and then we'll open the call for questions.
Thanks, Brian before.
Before we opened the call for questions I, just wanted to wrap up by reiterating our confidence in our strategy in long term outlook or.
Are incredible portfolio of brands provides us with.
Unmatched scale and reach within the modern golf ecosystem and ecosystem in which we believe we are the dominant player.
Our businesses, both individually and collectively have both high barriers to entry and are structurally position for accelerated profitable growth.
Overall, we see a business that is well capitalised has a long runway for continued growth.
And is set to ramp up free cash flow by year end and beyond.
With this we remain highly confident in our ability to meet or beat our long term financial targets.
We are optimistic about the future modern golf and believe that our portfolio premium brands uniquely positions us to be highly successful in it.
And now I will turn the call open for questions operator over to you.
Thank you we will now begin the question and answer session.
To ask a question you May press start then one on your Touchtone phone.
If you're using a speaker phone please pick up your handset before pressing the keys.
John Your question. Please press Star then too please.
Please limit yourself to one question and one follow up question.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Matthew Boss with J P. Morgan. Please go ahead.
Great. Thanks.
So chip could you just elaborate on the progression of top golf same venue sales that you saw it through the second quarter.
Maybe any commentary on July and just your overall confidence in a sequential back half improvement that you've embedded to add to your full year same venue sales growth guide.
Sure we look at the quarter Q2, Matthew.
We obviously were within our guide and it's our seventh consecutive quarter of positive same venue sale. So.
There really wasn't much new in that quarter that we didn't identify go Ah.
Going into the quarter other than a small impact from the Canadian wildfires.
And you know the consumer business remains strong.
Venue margins are improving the new venue growth is on track.
So a lot of good positives there.
And we called out in advance so we're going to have of events down a little year over year due to the post COVID-19 surge that.
Experienced in.
Late 21 and throughout 2022.
When you look at the progression from there you know.
It's not much of a move to go to 1% to 3% that.
We are calling for Q3 and then we gave you several of the key initiatives that are further helping.
Helping us in Q4.
We talked about the marketing campaign, we talked about the strength of the general consumer which is the lion's share of our business.
We also talked about a 1% improvement in part from Pi, 1% from price and 2% from the.
Lap of the unusually severe cold weather that we experienced last year and don't expect to repeat so I think that kind of at least directionally. If not provides a pretty specific walk of how we're getting to the full year number.
That's great and then just to follow up on the equipment side could you speak to recent retail sell out trends that you've seen maybe relative to three months ago, and just market share gains that you've seen for the Callaway brand and maybe just larger how would you characterize the health and composition of your inventory in the channel today as we headed.
Into the back half of the year.
Sure in Matthew these are all real.
Really strong stories, so we had a great quarter from a brand perspective.
Excellent market share results.
And the market is staying very healthy.
The round's play it is the biggest highlight of that being up 5.5%, but.
There is no question that the core golf consumer remains engaged in active.
And our inventories in the field as you would expect given our market share performance.
They're.
In very strong position they improved during the quarter and we were like where we sit going into the second half of the year from brand strength.
Product line.
And the the health of the consumer within the.
Very important golf segment.
Okay, great color best of luck.
Thank you.
Our next question comes from Randy Tonic with Jaffray's. Please go ahead.
Yeah. Thanks, guys just to follow up on back on top cop to start here, maybe just give us some perspective on how you're thinking about over the medium term where we are.
Yeah with the dynamic between pricing in traffic.
How much further do you think you have on pricing and how do you. How do you want us to think about normalized ability to drive sustained venue sales growth between pricing in traffic I think in the past and said one third pricing to trying to think I might have that back with just give US. A reminder reminder, parameters of how we should.
Thinking about the long term opportunity to drive more productivity per box over the medium term pop golf would be very absolutely.
Randy are really important.
Important.
Point, So if you look at our our consumer business at top golf you know.
It really remains strong and resilient.
We're <unk>.
Consistently driving Saint venue sales growth there and have throughout the.
Entire first half of this year and we're seeing a nice mix between pricing and traffic so positive traffic as well as price price or spend per visit a little higher than traffic, but nice.
Momentum and both candidly.
In the long term you know what you can expect from US is that we are gonna drive same venue sales growth.
Venues above and beyond the inflationary effects of our cost basis.
So.
Forecasting the inflationary <unk>.
Cost basis right now is is a dynamic process right.
You know it is Serge now, it's moderating it'll likely continue to moderate but we've shown.
It was clear evidence that we can take price and where we've taken price we've seen no negative impact.
It really comes down to the strength of.
Demand in the consumer and the only other thing I want to add there is you know we've got these initiatives and plays the marketing campaign pie.
Other.
Factors that are driving margin expansion.
Yeah. This is still early days on these we have gas in the tank on these these aren't been a time out in anywhere in the near future and we're developing more.
Great and then just my last follow up on while I go back to equipment as well you're talking about gas in the tank.
Where do you think we are.
In the maybe perhaps from an industry any company specific perspective on the ability to drive further margin opportunity.
On on clubs or just equipment generally through either.
Customization <unk> ball plan <unk> leverage that you drive more and more volume gaining share on balls can you give us some perspective on that dynamic on it.
There you see margin opportunity or just opportunity and generally speaking if I'm. These things would be super awesome exactly can be super helpful. Thanks, Yeah sure. Another another positive story, Randy because it's early innings on all of these were really starting to ramp up the.
Performance of the ball plan I had the.
Pleasure of visiting it a week ago and they've just transformed that place it's an impressive operation.
The efficiencies are improving rapidly.
As are the margins.
You know over the last several years, we've also seen a lot of inflationary pressures across the business with a lot of those are moderating right now it freight rates is a great example of that but we're also seeing a moderate in.
Other areas of the business.
And.
All of this again, we have shown that we can operate quite successfully through any of these environments and inflationary environments were able to pass it on.
In non-inflationary environments were able to.
Sustained the demand side of our business.
So you're seeing even this year margins gross margins now.
That are improving and we feel good about the long term outlook there.
Super helpful. Thank you.
Our next question comes from Alex Parry with Bank of America. Please go ahead.
Hi, Thanks for taking my questions I guess, just first can you give us a little more color on how.
How the corporate events business is doing versus walk in and then you know any more color on how you think about the rest of the year and sort of corporate events versus Walkin' does the guide assume.
Either part of of those.
Those parts of the segment improve versus the Chinese saw in the second quarter. Thanks.
Yeah. So you know obviously corporate events as we've mentioned as.
A down year over year, but you know really performing well versus 2019 levels. So if you'd looked at the two year stacks or a looked at the.
Comparison that wipes out some of the.
Post COVID-19.
Serge.
It is quite good.
The.
Consumer side of our business has.
Been steadily good and we're remains there and you know we really not expecting significant change in these trends through the balance of the year.
So.
Our assumptions are not for.
Marked change on any of those those trends does that answer your question Alex.
That's really helpful. I appreciate that and then I guess back to golf equipment. So I think early in the year you sort of said that you were thinking about the golf equipment business is sort of flat FX neutral for the year.
Sort of how you're still thinking about it and then could you just help us with any sort of quarterly quarterly fluctuations that we should be thinking about.
Any sort of product launches, we should be considering and then just on golf balls like the the growth there in the quarter is really really strong so is that level of growth something.
That should continue going forward. Thanks.
Sure. It is a couple of questions there hopefully I can get them all.
So the quarterly the last two are the ones that I remember most clearly so quarterly we're going to have a little bit more launch timing in queue for us. We currently planet versus Q3, but that timing happens across quarters. So we'll give you our best estimate on that but as you know from the golf equipment.
<unk> business.
Between quarters that can move a little bit and.
But we do have more launch activity in the second half of this or the second half of have to queue for versus Q3.
On the ball side, we've had excellent results. This year, we're on track to grow for the full year.
And really strong results as you can see during the quarter.
We will our growth and the ball will moderate during the second half of the year.
For a couple of reasons. One is we were constrained last year in queue too. So we had a little bit of carry over into Q3, which we haven't been constrained this year. So.
We won't have some of that carryover and then secondly Ah.
In our launch cycles.
When we're at the tail end of a product cycle for our euro same product.
We have to <unk>.
Shifts the plant to producing the new product and that's likely to be the case by the end of this year. So there.
There will be a little constraint that happens every other year it's.
It's a normal course of business in the.
Golf.
Business or not Ah, but something that you for those that want a model you should model.
And then in terms of full year, yeah, we obviously, having an excellent year in our golf equipment segment, we had about 100 million.
A dollar inventory.
Fill in the last year that we've talked about AD nauseum and it doesn't repeat this year. So we had to cover that.
And we're doing a pretty good job of that and growing share in our forecast for the year remain unchanged.
Perfect. That's really helped Oh, sorry go ahead.
Just as Jim mentioned.
Mentioned this growth in the second half a period over a period quarter over quarter most of the growth will occur in the queue for.
Again, it's chip mentioned it can move depending on timing.
Timing of shipments but.
Definitely heavily weighted towards the queue for.
Perfect. That's really helpful best of luck going forward.
Okay. Thanks, Alex.
Our next question comes from Daniel embroiled with Stephen. Thank please go ahead.
Yep Thanksgiving maintain our questions.
All of our top office will continue the trend you know obviously the same store sales are moderated kinda sequentially moving to follow up on Randy's question can you give the actual numbers or detail on traffic ticket growth and then when you look at the top of slowdown I guess, how do you think about the risk of other leisure activities, whether it's pickle ball or travel.
Or movies is that taking tropical where you guys monitoring any data.
Around like competitive just use it as a bit leisure time or or what are you seeing in terms of that when you look at a slow down in sales.
Well, Daniel unless pickle ball and.
The movies are taking way corporate events.
Think there's any data that suggests that as having much impact on us the.
The the.
At the same venue sales is.
Again, I apologize, it's very strong on the consumer side of the business in Brasilia.
There was no change in trend across the quarters.
The.
We feel very good about that the pickle ball is obviously growing you know from time to time, you'll have a movie that comes out we do compete against consumer activity Pickle ball is not a new trend.
And we have been growing in our our business and our brand for <unk>.
Seven consecutive quarters as a matter of fact, so we feel good about that.
I also think Daniel people on average only go to top it off you wanted to five times a year. So it's not something you're doing every week did now they want to go do pickle ball when they have to replace it they they fitness and with the rotation of other activities that they wanted to do.
And Daniel Steer me if I didn't answer the question completely and I can provide any further value there but.
Oh, you asked about specific traffic versus price sorry, and the.
I can give you just gender.
General.
In the quarter.
Because of events the total traffic was down a little bit.
But the traffic was up nicely in the consumer side of our business and you know for the full year, we expect it to be a mix of positive traffic.
And spend per visit with <unk> majority being spend per visit but we're going to <unk>.
Contribute 20% to 25% of our Saint venue sales growth through traffic.
Yep. Thank you for all the detail and then follow up on top golf I guess, you mentioned, obviously corporate as the weeks about here and that same sound specific but if we look at pre Covid I think corporate with 30% of total topped off revenue, but that was very fork you waited until I guess, we're staring down the back half that has a much higher mix of corporate revenue historically.
Corporate is the weak spot in top off right now I know, Brian walk through a few points, maybe what's gonna drive the acceleration into for Cuba that he can use help investors bridge that gap of of of what you guys see you to give you confidence in the improved sales given the corporate uncertainty were saying.
Okay. So let me just correct a few numbers for you to start with Daniel because you're Directionally correct, but the numbers were.
Slightly and accurate.
Corporate since we're saying that specifically is on average 21% of our total business in the venues for the full year in queue for it is roughly 28%. So maybe for Q4 year round to that 30, but 28 would be a more <unk>.
Nice.
Number and you know we obviously you know as we go through our we've got pretty good vision visibility on what the corporate trends had been in.
We've factored them into our guidance as best we can given you is what I think is.
A walk.
On some of the other factors.
So I'm not sure if I can add to much more color.
Right now in terms of.
We prefer not to get into specific estimates by sub.
Sub category by.
Quarter and I'm sure you can understand why.
Absolutely I'll hop back in queue. Thanks for the color.
My next question comes from Noah.
Ken with Keybanc capital markets. Please go ahead.
Hi, Thanks for taking my questions.
Maybe maybe switching gears to apparel, just hoping you could provide some color both on inventory levels and channel health along with the level of Promotionality, you're seeing the channel and then I guess relatedly within active lifestyle strong gross margin improvement in the quarter, hoping you could help bridge to the EBIT margin pressure you saw.
And then just any collar on how we should think about margins, they're moving through the back half. Thanks.
Okay.
Brian I'm gonna throw that margin one your way so I don't know, whether we have anything on that at this point, but in terms of the the field inventories in inventory levels in general.
You know, it's a little bit of the same story in golf equipment, but is going to take a little longer as the long and short answer of it so inventories build up in.
In the field over the 2022 they are in process of correcting we had a strong sell through quarter for our brands.
We feel like we're in good position.
At four ahead of our plan from that basis.
It's a little more promotional than it was.
Ah well, it's a lot more promotional than it was in 21 and 22 and there were no inventory and nobody promoted anything.
I wouldn't call it highly promotional right now and.
We feel good about those trends.
Brian do you have any color for the margin expectations for the balance of the year I think what you might be seeing now is just a little bit noise between the quarters because Q1.
We had stronger volume.
10-Q, two and it's another one of those Covid quarterly comparison issues, because our supply chain corrected. This year. So we shift the product when we're supposed to ship it which was Q1 last year, we shipped a lot of it in queue too because we couldn't get it and so now.
When you compare the quarters.
Q1, and Q2 look walkie, if you look at the half it looks pretty solid and it's very representative and.
We're on track or a trend for our plan there.
Yeah.
So.
For the second half, we would expect it to be up so that the trends ship mentioned is pretty good. If you look at the half the first half within second half and we get we're going to continue to get some benefits from.
Free and then also from effects and that will help those as well and just the continued sales growth in the back half.
Thank you very helpful.
Thank you.
Our next question comes from my Martin Matala with Raymond James. Please go ahead.
Hi, This is Marty <unk>.
Your commentary about the ramp up for four Q.
Three Q got into this a little bit faster than what the strict expected I was wondering if you can get a little bit more commentary around that thank.
Thank you.
Martin I, it's hard for me to comment on what the Street would have expected because the street didn't have any of the information that we had in terms of actual.
Results so.
I think it's pretty logical and believable.
When we look at how it ramps.
Based on the actual facts, so I guess.
Since the purpose of these calls.
Okay. There now and it was kind of made on this on this call and the virtual investor days as well.
That you are open the door for self financing for top golf venues. Just wondering if you can get a little bit of Ikea. The reason that you're looking down that path and me with my education could mean.
Sure. Thanks, Martin this is Brian .
We wanted to provide.
Flexibility to do so right now the <unk> cap rates have been holding stable for us I know everyone else has been seeing a lot of increase interest rates, but they build reasonably stable and I think there's a few reasons for that we tend to run a competitive process, we have more reach that have interest.
And working with US now the venues have become more proven and are less risky to the region. So everything has been holding occasionally you run into a site for whatever reason it may not be interested or just to keep.
Keep your Monostome the rates, we wanted the flexibility to be able to sell finance if that proves to be economically feasible for us.
Great. Thank you that's very helpful.
Thank you.
Our next question comes from John David Cannon with T. D. Cowan. Please go ahead.
Alright, good afternoon, Thanks for taking my question.
Sure.
Right I just wanted to go.
To the Opex line.
Specifically the Deleveraged.
Occurring on the operating expenses per cent a sale to think it was about 400 basis points in the first half of it.
Based on the Q3 guidance Mmm Mmm, probably have to have significant leverage by Q4 on this line how how should we think about the balance between topline investing in top golf in that operating expense line, which seems to be driving a lot of the margin deleverage yep.
I think a lot of it is we've been talking about the labor marketing all year and how those constitute a lot easier in the second half I mean, it is significant if you look at it as being.
It will shift from being a headwind to a tailwind first half second half.
It's four to 500 basis points.
So you can get that plus improve profitability.
Significant lift there and I think that's probably what you are saying.
Okay got it just it just seems like in Q3, that's gonna remain pretty significant headwind just based on the the EBITDA guidance of game for Q3, and then it had to switch to a pretty meaningful tailwind biking for.
Yeah. It does because a lot of the actions will happen in Q3 and then.
<unk> towards the queue for.
Got it and that is <unk>.
Meaningful improvement in the EBITDA margin by Q4.
That being driven more by soft offers that balance between the golf equipment business cent alcohol.
A lot of it has topped off for the things, we just mentioned plus the increase in the same venue sales.
But there is also improvements in other gross margin the other business and gross margins as well.
Especially with the.
Second half product launch.
Foreign currency freight rates.
It's all adding up to be a pretty nice improvement for the EBITDA margin.
Okay got it thank you.
Our next question comes from Michael Schwartz with tourists Securities. Please go ahead.
Good evening and.
With regards to the the full swing acquisition it give us a little <unk> on just the background with an acquisition what it provides you and then.
This is not a material.
In terms of revenue.
Hey, Michael ship, so swing sweets is it's more of a strategic acquisition that it is a <unk> material. One so swing suites, you know for those on the call that are not familiar with it is.
A almost a lounge business that you would find that resorts and premium hotels Sue you visit omni and it's top golf swing sweets and then you would see these.
Days that you can go in and hit balls and play games and entertain and it has the top golf brand on it but it wasn't it was a business that we had had prior to the merger.
The previous.
Previous owners had.
Licensed out long term license too full swing and so it wasn't being controlled by.
Top golf, it's a <unk>.
<unk> business. It has our brand on it it has some good long term potential, but it's a small business, it's roughly on a gap basis.
$5 million in revenue.
So very small there it'll.
It'll be accretive from a cash basis about $2 million <unk>.
Starting next year it'll be accretive this year, but I'm, giving your annual numbers here not partial your numbers.
So not a material business, but a strategically very attractive one part of the brand something we do think we can grow.
And something even potentially more importantly.
We wanted to control given you know how.
Positively we feel about the topped off brand in the long term potential there.
Uh-huh.
Brian with regards to the national improvements in the back half of the year.
Part of that is is working capital.
Bringing down inventory and the products business, just given the fourth quarter Lawrence.
Should we expect.
The inventory to come down more materially over the next few quarters relative to the nine 120 in the first half.
Well, it's come down a significant amount and then you have to remember towards the end of the year will start ramping up for the launches next year. So you have to build that into it but that will be next year's launch and next year's product, but this year. It will continue to come down but there is usually.
Usually left sale less sales in the second half of the golf business anyway, but it'll be in good shape by the end of the year.
Yes, that's the bottom line, our inventory will be in great shape and all current.
Uh-huh.
Thank you.
Our next question comes from Eric <unk> be Riley Securities. Please go ahead.
Good afternoon, certainly have one question I know that some classic back you you start <unk> raise it a little bit of Q1 you.
Reaffirmed it.
On this call it looks like a lot of confusion has been around quarterly cadence given a number of wonky comparisons to last year.
<unk> <unk> <unk> top golf equipment catch up the weather's shutdowns in queue for I guess.
<unk>.
So four months less than a year, assuming nothing wonky happened much four months cause I can to normalize everything says that the next year's quality cadence should be normal was about 70, where comparisons in certain quarters.
Eric This is chip the short.
The answer was.
Obviously fingers crossed is yes.
What we had a decision to make at the beginning of the year, which do we start comparing against 2022 numbers because 20th 19 was so long ago and we made the obvious decision, which is probably the only decision to do that.
But you know it.
It has a lot 2022 still had a lot of COVID-19 and.
We'll call one time.
Noise in it.
This is not fundamental to our business.
Doesn't really impact long term.
But we had these inventory catch ups and inventory shortages and.
Periods, where COVID-19 was impacting consumers at top golf and.
So there's bear with us as we get through it and the balance of the year and yes, it should be.
Cleaner going forward.
Oh, that's perfect I appreciate it thanks.
Our next question comes from Casey Alexander Webb Compass point Research and training. Please go ahead.
Yeah. Thank you and I think there's been pulled apart in about every way possible so far but.
The discussion to cat cash flows.
You should turn positive for top cops at the end of the year is obviously, a big swing the golf business is always generated nice cash.
What kind of cash flow range are you thinking about for 2024, and what would you like to do with it is it is it to pay down debt and if so what kind of a net leverage ratios that you'd like to get it till.
Like a normalized basis.
<unk>.
Brian we're not going to provide guidance at this point on cash flow for next year, but we agree that it will generate.
Significant cash flow.
As far as what we deal with it.
Well, we paying down debt is an obvious one investing back into businesses are primary when we do but we have plenty of availability at this point, so will monitor it and we'll we'll balance between investing back into business.
Making sure our leverage ratios are on track to decrease in the longer term, we wanted to get below three times.
And then a balance between returning capital to shareholders and.
Other investments smaller investments.
Alright, thank you.
Thank you Kathy.
This concludes that question and answer session I would like to turn the conference back over to <unk> for any closing remarks.
Well, thank you everybody for dialing and we appreciate your participation and questions and we'll look forward to.
Gauging with U P.
Post call where appropriate and.
Look forward to continued update on our journey.
I do want to say I'm very pleased and I believe that the business is continuing to strengthen as as fundamental economic engine.
And I hope that came through in our comments. Thank you for your time.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Welcome to the top golf Callaway brands second quarter 2023 earnings Conference call, all participants will be in listen only mode.
So do you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions. Please note that this event is being recorded I would now like to turn the conference over to Katina <unk>, Vice President of Investor Relations and corporate Communications. Please go ahead.
Thank you operator, and good afternoon, everyone welcome to top golf Callaway brands second quarter 2023 earnings Conference call I'm Katina Mitsotakis, the company's vice President of Investor Relations and corporate communications.
Joining me as speakers on today's call are chip Brewer, our president and Chief Executive Officer, and Brian Lynch, Our Chief Financial Officer, and Chief Legal Officer.
Earlier today, the company issued a press release announcing its second quarter 2023 financial results. In addition, there was 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 Relations website under the financial results tab.
Most of the financial numbers reported and discussed on today's call are based on U S. Generally accepted accounting principles in the instances, 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 that this call will include forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's differ 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'd now like to turn the call over to chip Bergh.
Thank you Katina and welcome to the team.
Good afternoon to everyone on the call and thank you for joining us today.
Q2 was a solid quarter for top golf Callaway brands, driven by strength across all our business segments.
At the halfway point of 2023 here are just the highlights of what we see.
Market share gains and brand growth in golf equipment.
A stronger economic model and proven growth algorithm and the top golf venue business.
And continued growth in our apparel assets.
We also see a resilient and engage consumer across all of our businesses.
We remain on track to deliver strong EBITDA growth for the full year.
And a transition to being cash flow positive both at the corporate level as well as that top golf individually.
This transition to being cash flow positive is an important milestone for our business and we're confident it will ramp from here.
Having said this we also recognize that there is more quarterly noise in our results and it would be ideal.
Most significantly last year's retail inventory catch up and our golf equipment business and separately the post COVID-19 surge in the events business the top golf make year over year quarterly comparisons difficult and cloud the true progress, we're making in improving the fundamental economic engine of our business.
In our comments today, we hope to clearly explain this short term volatility.
As well as highlight the long term positive story of continued improvement in the earnings power of our business and the resilience of our core modern golf consumers.
With that said, let's shift gears and talk about the business segments.
We'll start by discussing top golf.
This is a business, which is expected to add three to 4 million new off course golf participants each year for every 11, new venues and thus will help drive growth across the entire modern golf ecosystem.
With this growth.
Top golf will soon have more consumers visiting it than exist in all of us on course golf.
Including one half of the total on course golf population as many now participate in both on and off course golf.
And what is truly a synergistic relationship top golf sister brands at our company, we will be helping drive this growth and also have a competitive advantage and reach so all of these modern golf consumers.
Yeah.
As outlined by Rd is June 1st Fireside chat there are three key performance drivers for our top golf venue business.
First is our development pipeline.
Second is the same venue sales growth and third is the venue margin expansion.
Let's walk through each one.
Starting with our development pipeline. This quarter, we successfully opened two new venues in King of Prussia, Pennsylvania in St. Petersburg, Florida, both of which drove excitement and brand heat in those regions.
We're pleased to report that our new venues continue to perform extremely well and we remain on track to open 11, new owned and operated venues in 2023 in line with our guidance.
Turning to our second performance drivers same venue sales.
As expected top golf posted its seventh consecutive quarter of same venue sales growth. Despite challenges from temporary venue shutdowns from air pollution caused by the fires in Canada.
Same venue sales for the quarter was within our guidance range at approximately 1%.
And the two year stack, which takes out some of the post COVID-19 related volatility.
And even more impressive 9% growth.
As we discussed last quarter, we fully expected Q2 to be challenging from a comp perspective as last year's same venue sales benefited from a post COVID-19 surge in the events business.
That said, we are maintaining our same venue sales guidance for the full year based on the continued strength in the consumer portion of our business along with new initiatives that will ramp during the second half and some nuances in the quarterly comparisons.
Let me give you more detail on each of these and walk you through how we get to this conclusion.
First and most importantly.
We have seen consistent and strong growth in the consumer led portion of our business.
This category represents the lion's share of our business and we believe it is the best indicator of brand heat.
Second as of Q2, we have made continued progress on our digital journey, including reservations.
In fact U S venue digital sales penetration increased eight points versus last year to approximately 34%.
The largest driver of this growth is our digital inventory management system Pie, which has now been rolled out to over half of our venues.
This system allows us to maximize sales improve the customer experience and optimize costs.
And we continue to expect to have all venues on pie by the end of the year.
More specifically to this section of our call on an individual venue basis. It helps drive approximately a two point increase in same venue sales post implementation.
And given the timing of the rollout we estimate it will add at least 1% to same new sales in Q4.
Third we have and are taking incremental pricing both in game play and food and beverage.
Based on our experience as well as competitive positioning we believe this will have at least a 1% positive impact on same menu sales primarily in Q4.
Fourth we're excited about a new innovative marketing campaign, which will launch later this month. It is designed to both captivate an appeal to the modern golfer and to drive both incremental awareness and visits I'm.
I'm not going to ruin the surprise by trying to describe it to you on this call, but I'm sure you'll notice it and I hope it makes you smile.
Lastly, we believe our second half comp will be slightly less challenging than our Q2 comp.
This is because we expect the lap of last year's especially strong events business to be somewhat less of a headwind for the second half of the year.
And last year's Q4 comp was negatively impacted by approximately two points by venue closures due to extreme cold weather, which we don't expect to repeat this year.
Moving on to our third performance driver venue margin expansion.
Cogs and labor optimization, along with continued leverage of fixed overhead costs drove sequential quarter over quarter improvement in our Q2 adjusted EBITDAR margins.
This in turn drove total segment EBITDA towards the high end of our range. Despite xen same venue sales coming in towards the low end.
This is just a fantastic story and it highlights how our venues are becoming increasingly profitable.
<unk> continues to be a key ingredient to our venue margin expansion.
It does so by facilitating increase reservations, which in turn support more predictable labor scheduling and increase their utilization.
As mentioned at the end of Q2 more than half of our venues had implemented pie and we expect to have all venues utilizing pie by the end of the year.
The top golfs teams excellent work over the last few years puts us well ahead of the plan laid out at the time of the merger.
And in a strong position to achieve the updated target venue unit economics, we provided last quarter, including approximately 35% four wall adjusted EBITDAR margins.
Two and a half year payback period.
A 20% return on gross investment.
And 50% to 60% cash on cash returns.
Together these targets represent a fundamental long term improvement in the cash generation and profitability of our venue business.
In essence, a step change in value.
Lastly, turning to top tracer.
I want to quickly highlight is success in the quarter and continued dominant leadership position as golf's number one range technology.
We continue to see healthy demand for this product with accelerating bay installations versus Q1 and.
And we are on track to install at least 7000 days this year in line with our guidance.
Moving to our golf equipment segment, and another example of strong execution.
We delivered improved U S market share performance in the second quarter and what has been an excellent year to date for our brand.
In both tour exposure and product performance.
In June we saw U S market share gains in every category in both the on and off course channels.
For both the month of June and year to date, our brand is number one in drivers fairway Woods hybrids total woods and irons.
We're also number two in putters in golf ball with strong shares in these categories as well.
This performance shows the continued strength of our brand and our products.
Our paradigm line of clubs, which launched in Q1 was the primary driver of this success.
Paradigm had continued strong demand throughout Q2 and has been exceptional on tour all year with the paradigm driver winning an impressive nine times on the PGA tour year to date.
Not surprisingly paradigm is the number one selling driver and fairway wood model year to date in the U S.
I am proud of these results and I believe our performance. This year has further strengthened our brand.
This in turn will benefit our shareholders not only this year, but going forward.
In other brand news just last month, we announced the extension of our long term partnership with Masters champion John Rob.
John will continue to play both Callaway and Odyssey equipment.
Where callaway headwear, Travis Matthew apparel, and footwear and champion top golfs business, including the top golf logo on the side of his headwear.
This is another wonderful example of how we are achieving synergies across our brands.
Looking at the overall golf industry and the health of the game. The U S hard goods market continues to hold up quite well down just one 6% June year to date consistent with our expectations.
In addition, all signs point to golf participation remaining robust with U S rounds played up five 5% through June year over year and strong demand for consumables in the quarter.
Looking ahead, our leadership position in R&D investment and more specifically our expertise in the use of AI in the development of product.
It gives me continued confidence in our current and future product pipeline.
Turning now to active lifestyle.
Travis Matthew had double digit growth again this quarter. The brand continues to successfully opened new retail stores, including five year to date and totaling 46 overall.
The team also continues to do a tremendous job executing the new women's category expansion.
Which has now grown to become a mid single digit percent of overall sales and early sign of success.
Travis Matthew also continues to find exciting ways to grow its brand in the modern golf ecosystem, including building additional synergies across our brands.
In June the brand had a very successful marketing activation event at the ACC Golf tournament in Lake Tahoe.
This high profile event drew participation from several Travis Matthew ambassadors as well as Callaway brand ambassadors Stephan Curry, who went on to win the event via dramatic walk off Eagle finish.
Both Callaway and Travis Matthew, including New Travis Matthew brand Ambassador Reggie Bush also participated at top Golfs U S open event at El Segundo.
We feel incredibly proud to partner with ambassadors, who share our excitement about the growing modern golf ecosystem and.
And our teams are increasingly enjoying opportunities to leverage cross brand synergies.
Moving along Jack Wilson had a good first half despite choppy macro backdrop in Europe as well as earlier shipment timing this year versus last year as supply chain corrected.
Jack will skin remains on track for steady growth in both revenue and profits for 2023.
In conclusion, we're excited about the strategic direction of our portfolio of global brands in the growing modern golf ecosystem.
In the near term our brands are strengthening and we remain on track to deliver impressive EBITDA growth and transition to positive free cash flow this year.
This inflection point is just the first step in what will be a strong long duration story of overall growth in both EBITDA and cash flow.
As we do this our top capital allocation priority continues to be investing in the profitable growth of our business, most notably in new venues.
This is an area, where we have demonstrated strong competency in selecting building opening and operating these unique and high performing assets are topped out venues are delivering increasingly attractive returns and we have a high degree of confidence in their performance both out of the gate.
And over time.
Looking forward, we remain excited and optimistic about our business, which benefits from a defined leadership position in modern golf.
Synergies across our portfolio of premium brands and a clear path to continued profitable growth.
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.
We are pleased with our Q2 results, which showed strength across each of our segments and progress against each of the key top outperformance drivers chip discussed.
Including continued development of 11, new venues this year.
Seven consecutive quarters of same venue sales growth.
And good progress toward our venue margin expansion goals.
This progress together with continued high consumer demand for on and off course golf.
Receding inventory levels and improved liquidity puts us in a strong position to deliver positive free cash flow this year and to meet or exceed our long term financial targets.
Now, let's turn toward our second quarter financial results.
Second quarter net revenue was $1 2 billion, an increase of five 7% year over year or six 5% on a constant currency basis.
Which was in line with our guidance.
This increase was led by top golfs robust six 2% year over year revenue growth.
We achieved this result, despite an $8 million negative impact from changes in foreign currency exchange rates.
In the post COVID-19 inventory filling at retail and our products businesses, which primarily impacted the first half of 2022.
Q2, non-GAAP operating income was 135.
$5 million down approximately.
23% and flat on a constant currency basis year over year.
We are pleased with this performance considering both the challenging lap of the inventory filling at retail and our products businesses as well as the planned investments in labor and marketing we made into the top golf business.
Q2, non-GAAP non-GAAP net income was $77 8 million a decrease of $15 $7 million compared to Q2 2022.
The decrease was attributable to a $23 million increase in interest expense.
Primarily due to higher interest rates and an additional term loan debt related to our recent debt refinancing.
Lastly, Q2, adjusted EBITDA was ahead of our guidance range at $206 $2 million down 5% compared to last year, primarily due to unfavorable changes in foreign currency rates.
Q2, adjusted EBITDA increased 2% on a constant currency basis.
Driven primarily by operational efficiencies.
Now, let's turn to our segment performance.
In the second quarter top golf revenue increased $67 1 million.
Two $471 million a year over year increase of 16, 6% driven.
Driven by the addition of 11, new venues and approximately 1% same venue sales growth, which was within our guidance range.
We estimate that the impact from temporary venue shutdowns caused by fires in Canada was worth about a point of same venue sales.
We believe it is helpful to compare same venue sales and a two year stack basis, because it removes some of the COVID-19 related volatility and demonstrates the strength of our venue business.
On a two year stack basis same venue sales growth for Q2 was 9%.
By comparison in Q1, 2023 semi new sales was 11% and on a two year stack basis was 14%.
<unk> segment operating income was $44 million, which was largely flat versus last year.
As mentioned previously this result in large part reflects the planned increase in marketing expenses related to top cups come play around marketing campaign and investments in labor, we made in Q3 of 2022.
Importantly, the underlying earnings power of this business continues to increase and we remain on track to achieve our four wall adjusted EBITDAR margin target of 35% by 2025, if not sooner.
<unk> adjusted EBITDA was $92 million up approximately $6 million compared to Q2.
Last year.
And at the high end of our guidance range due to solid performance at our new venues and improved operational efficiencies at existing business.
Golf equipment, net revenue was $451 million flat year over year and up 1% in constant currency.
This was good performance considering the previously mentioned retail channel fill in last year and the unfavorable changes in foreign currency rates.
These headwinds were largely offset by our increased market share gains in golf clubs strong golf ball sales and continued strength in overall rounds played.
Golf equipment segment operating income was $96 4 million.
A three 9% decline versus Q2 2022, primarily due to unfavorable changes in foreign currency exchange rates.
This result, partly offset by stronger gross margins, which increased approximately 100 basis points year over year due to increased pricing and lower freight costs.
Lastly, Q2 active lifestyle segment revenue was $258 million.
Slightly down or flat on a constant currency basis as compared to Q2 2022.
This result was in large part due to a shift in timing of wholesale wholesale shipments between Q1 and Q2 as compared to 2022.
This is evident in our first half results were active lifestyle revenue increased 13, 3% year over year.
Q2 active lifestyle operating income of $19 5 million decreased $3 million versus Q2 2022 due to planned operating expenditures to support growth and was partially offset by gross margin increases related to price increases and a higher mix of direct to consumer business.
Moving to our balance sheet.
As a reminder, we completed a significant debt refinancing in March of this year, which added approximately $300 million of additional liquidity reduced our cost of the refinance debt and extended the maturities of our credit facilities.
We not only simplified and strengthened our capital structure, but also gave ourselves flexibility ability on how to finance top golf venues.
Including self financing, which provides us with another option as we decide how to finance future venues.
As of June 32023 available liquidity, which is comprised of cash on hand, and availability under our credit facilities was $648 million compared to $415 million at December 31, 2022.
And as compared to $640 million at June 30 of 2022.
At quarter end, we had total net debt of $2 two 4 billion.
Which excludes convertible debt of approximately $258 million.
Compared to 144 billion at the end of Q2 2022.
This increase relates primarily to incremental new venue financing the additional $300 million of term loan debt and normalization of working capital for the non top golf business.
Our net debt leverage which excludes the convertible debt was four one times at June 32023, compared to two seven times at June 30 of 2022.
The year over year increase was due to new venue development and increases in working capital.
Our net debt leverage ratio was in line with March 31, 2023, which is a little better than we discussed last quarter.
We continue to expect our leverage to decline in the back half of the year as we generate free cash flow.
Consolidated net accounts receivables $397 million compared to $376 million at the end of Q2 2022.
Non top golf days sales outstanding increased slightly from $55 to 58 days.
Our inventory balance increased to $840 million compared to $640 million at June 32022, and is down from our December 31, 2022 balance of $959 million.
The teams active inventory management has led to a reduction of $119 million in the first half of 2023.
Continued momentum in our golf equipment and active lifestyle segments gives us confidence that we.
We remain on track to be at more normal levels of inventory by the end of the year.
More importantly, we feel good about the quality of our inventory as much of the older inventory was cleaned up during the pandemic.
Gross capital expenditures were approximately $263 million for the first six months of 2023 compared to $243 million for the first six months of 2022.
Net capital expenditures, which net out the proceeds from construction reimbursements.
Were $148 million and $154 million in the first six months of 2023 and 2022, respectively.
For full year 2023, we expect total company net capital expenditures of $270 million, which includes $190 million from top golf.
Before moving to our outlook I want to comment on a few other matters.
First is the form 8-K, we filed yesterday.
Last week, we identified unusual it system activity and immediately took proactive steps in consultation with our advisors to secure systems.
We activated our incident response planning a move portions of our network offline as a precautionary measure.
The majority of our systems are back online and full access is expected to be restored in the coming days.
Based on what we know now we do not believe the incident will have a material effect on our business operations or financial results.
Second during the quarter, we repurchased 1 million shares in open market transactions for a total cost of $17 8 million.
Finally, I want to provide a brief update on our relationship with full swing.
Owners of the swing suite indoor golf simulation technology that delivers golf ball tracking data and measures ball flight indoors.
On August one 2023, we acquired certain assets of the swing suite business for approximately $12 million.
This small acquisition is strategically relevant to us as it allows us to control the use of the top golf brand in this channel and from a financial perspective. It is immediately cash flow positive in year one.
Now turning to our balance of the year outlook.
We are maintaining our full year 2023 revenue guidance range of $4 42 billion to.
Two for $4 7 billion.
And our adjusted EBITDA range of 625 million.
Two $640 million.
A top golf, we continued to guide to approximately $1 9 billion in revenue and an adjusted EBITDA range of $315 million to $325 million.
We are also reaffirming same menu sales guidance to be mid to high single digits.
For the quarter.
For the third quarter of 2023, we estimate revenue to be within the range of 1.05 billion.
And 1.0 to 75 billion.
Compared to $989 million in Q3 2022.
For top golf, we estimate third quarter same venue sales growth between 1% and 3%, which would represent 12% to 14% growth.
The two year stack basis.
We estimate Q3 consolidated adjusted EBITDA of 141 $254 million, which is slightly ahead of Q3 2022.
Now I'd like to provide some additional details you can better understand our second half guidance, including the cadence between Q3 and Q4.
Top golf second half sales growth will be more heavily weighted towards Q4 versus last year for several reasons and.
In Q4 2022, there were some unusually severe weather that led to the shutdown of a significant number of our venues negatively impacting semi new sales by approximately two percentage points.
We are assuming that shutdown does not repeat in Q4 this year.
Pricing, we are taking at the end of Q3 should also provide at least a one percentage point lift to same venue sales in Q4 versus Q3.
Our pie initiatives should also provide at least a one percentage point lift in same AG sales in Q4 versus Q3.
Further we expect top golf profitability to improve in the second half as the year over year comparisons for marketing and labor become much easier.
And increased pricing and improved operational efficiencies in our venues from Pi and other initiatives continue.
Moving to our products businesses, we expect growth in the second half as we will no longer be lapping the retail channel inventory filling in that occurred in the first half last year.
Also our second half golf equipment launch schedule is more heavily weighted towards Q4 this year as opposed to Q3 last year.
And on a consolidated basis, we expect changes in foreign currency rates and lower freight expense to be tailwind in the second half of this year, especially in Q4.
Overall, and despite the ongoing macro volatility our business fundamentals remain strong the modern golf consumer remains healthy and engaged we are on track to deliver double digit revenue and EBITDA growth this year.
We're also successfully managing down our inventories.
And our liquidity position is strong and finally, we expect to generate fee free cash flow this year on a consolidated basis and.
And in top golf well ahead of our plan at the time of the merger, which is a significant proof point for unlocking shareholder value.
That concludes my prepared remarks for today I will pass it back over to chip for some additional comments and then we'll open the call for questions.
Thanks, Brian .
Before we open the call for questions I, just wanted to wrap up by reiterating our confidence in our strategy and long term outlook.
Our incredible portfolio of brands provides us with.
Unmatched scale and reach within the modern golf ecosystem, an ecosystem in which we believe we are the dominant player.
Our businesses, both individually and collectively have both high barriers to entry and are structurally positioned for accelerated profitable growth.
Overall, we see a business that is well capitalized has a long runway for continued growth.
And is set to ramp up free cash flow by year end and beyond.
With this we remain highly confident in our ability to meet or beat our long term financial targets.
We are optimistic about the future of modern golf and believe that our portfolio of premium brands uniquely positions us to be highly successful in it.
And now I will turn the call open for questions operator over to you.
Thank you we will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two please limit.
Night yourself to one question and one follow up question.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Matthew Boss with Jpmorgan. Please go ahead.
Great. Thanks.
So chip could you just elaborate on the progression of top golf same venue sales that you saw through the second quarter.
Maybe any commentary on July and just your overall confidence in the sequential back half improvement that you've embedded to hit your full year same venue sales growth guide.
Sure.
When we look at the quarter Q2.
<unk>.
We obviously were within our guide and it's our seventh consecutive quarter of positive same venue sales. So.
There really wasn't much new in that quarter that we didn't identify.
Going into the quarter other than a small impact from the Canadian wildfires.
And.
The consumer business remains strong.
Venue margins or improving the new venue growth is on track.
So a lot of good positives there.
We called out in advance that we're going to have of events down a little year over year due to the post COVID-19 surge that we.
We experienced in late 'twenty, one and throughout 2022.
When you look at the progression from there.
Not much of a move to go to 1% to three 2% debt.
We're calling for Q3.
And then we gave you several of the key initiatives that are further helping us in Q4.
We talked about the marketing campaign, we talked about the strength of the general consumer which is the lion's share of our business.
We also talked about a 1% improvement in part from Pi, 1% from price and 2% from the.
The lap of the unusually severe cold weather that we experienced last year and don't expect to repeat so I think that kind of at least directionally. If not provides a pretty specific walk of.
How we're getting to the full year number.
That's great and then just a follow up on the equipment side could you just speak to recent retail sell out trends that you've seen maybe relative to three months ago, and just market share gains that you've seen for the Callaway brand and may be just larger how would you characterize the health of the composition of your inventory in the channel today as we.
Into the back half of the year.
Sure.
Matthew These are all really strong stories, so we had a great quarter from a brand perspective.
Excellent market share results.
And the market is staying very healthy.
Our rounds played is the biggest highlight of that being up five 5%, but.
Yes, there is no question that the <unk>.
Core golf consumer remains engaged and active.
And our inventories in the field as you would expect given our market share performance.
There.
In very strong position they improved during the quarter and we like where we sit going into the second half of the year from brand strength.
Product line.
And the health of the consumer within the very important golf segment.
Great color best of luck.
Thank you.
Our next question comes from Randy <unk> with Jefferies. Please go ahead.
Yes, Thanks, guys just a follow up on back on top golf to start here maybe.
Maybe just give us some perspective on how youre thinking about over the medium term where we are.
What's the dynamic between pricing and traffic.
How much further you think you have on pricing and how do you. How do you want us to think about normalized ability to drive sustained venue sales growth between pricing in traffic I think in the past you said, one third pricing to traffic I might add that back. We're just just give US a reminder reminder, parameters on how we should.
Be thinking about the long term opportunity to drive more productivity per box over the medium term the top golf will be very absolutely.
Randy are really important.
Important.
Point, So if you look at our our consumer business at top golf.
<unk> remains strong and resilient.
We're.
Consistently driving same venue sales growth there and have throughout the.
The entire first half of this year and we're seeing.
A nice mix between pricing and traffic so positive traffic as well as price price or spend per visit a little higher than traffic, but nice.
Momentum in both candidly.
In the long term.
You can expect from US is that we are going to drive same venue sales growth.
The venues above and beyond the inflationary effects of our cost basis.
So.
Forecasting the inflationary.
Cost basis, right now is a dynamic process right.
Serge now it's moderating it will likely continue to moderate but we've shown.
With clear evidence that we can take price and where we've taken price we've seen no negative impact.
It really comes down to the strength of.
Demand in the consumer and the only other thing I want to add there is we've got these initiatives in place the marketing campaign Pi.
Other factor.
Factors that are driving margin expansion.
This is still early days on these we have gas in the tank on these arent going to time out and anywhere in the near future and we are developing more.
Great and then just my last follow up on I wanted to go back to equipment as well.
You're talking about gas in the tank.
Where do you think we are.
And the maybe perhaps from an industry and company specific perspective on.
The ability to drive further margin opportunity.
On clubs or just equipment generally through either.
Customization fittings and door ball plant fixed cost leverage as you drive more and more volume gaining share on balls can you give us some perspective on that dynamic.
Where you see margin opportunity, our largest opportunity and generally speaking.
Some of these things would be super helpful. In exactly can be super helpful. Thanks, Yes, sure. Another another positive story or Andy because it's early innings on all of these were really starting to ramp up.
Performance of the ball plan I had the <unk>.
Pleasure of visiting at a week ago, and they've just transformed that place it's an impressive operation.
The efficiencies are improving rapidly.
As are the margins.
Over the last several years, we have also seen a lot of inflationary pressures across the business, but a lot of those are moderating right now freight rates is a great example of that but we're also seeing a moderate in <unk>.
Other areas of the business and three.
Throughout all of this again, we have shown that we can operate quite successfully through any of these environments and inflationary environments, we're able to pass it on.
In non inflationary environment, we're able to sustain the demand side of our business.
So youre seeing even this year margins gross margins now.
That are improving and we feel good about the long term outlook there.
Super helpful. Thank you.
Our next question comes from Alex Perry with Bank of America. Please go ahead.
Hi, Thanks for taking my questions I guess, just first can you give us a little more color on.
How the corporate events business is doing versus walk in and then any more color on how you think about the rest of the year and sort of corporate events versus walk in does the guide assume.
Either part of those.
Those parts of the segment improved versus the trend you saw in the second quarter. Thanks.
Yeah, So obviously corporate events.
We've mentioned is.
A down year over year.
But really performing well versus 2019 levels. So if you looked at the two year stacks or looked at the.
Comparison that wipes out some of the.
Post COVID-19.
Serge.
It is quite good.
<unk>.
The consumer.
Consumer side of our business has.
Been steadily good and remains there and we're really not expecting significant change in these trends through the balance of the year.
So.
Our assumptions are not four marked change on any of those of those trends does that answer your question Alex Yes.
Yes, that's really helpful. I appreciate that and then I guess back to golf equipment. So I think early in the year you sort of said that you are thinking about the golf equipment business is sort of flat FX neutral for the year.
Sort of how you're still thinking about and then can you just help us with any sort of quarter or quarterly fluctuations that we should be thinking about.
Any sort of product launches, we should be considering and then just on golf balls like the growth there in the quarter is really really strong so is that level of growth something that.
That should continue going forward. Thanks.
Sure a couple of questions there hopefully I can get them all.
So the quarterly.
Last two are the ones that I remember most clearly so quarterly.
We're going to have a little bit more launch timing in Q4 as we currently plan it versus Q3.
But that timing happens across quarters. So we'll give you our best estimate on that but as you know from the golf equipment business.
Between quarters, it can move a little bit and.
But we do have more launch activity in the second half of this or the second half of half to Q4 versus Q3.
On the ball side, we've had excellent results. This year, we're on track to grow for the full year.
And.
Really strong results as you can see during the quarter.
We will our growth in the ball will moderate during the second half of the year for couple of reasons. One is we were constrained last year in Q2, So we had a little bit of carryover into Q3, which we haven't been constrained this year. So.
We won't have some of that carryover and then secondly.
It's in our launch cycles when we're at the tail end of a product cycle for our urethane product.
We have to.
Shifts the plant to producing the new product and that's likely to be the case by the end of this year. So there.
There will be a little constraint that happens every other year, it's a normal course of business in the <unk>.
Golf busy.
Business, so not that something that you for those that want a model you should model it.
And then.
In terms of full year, yes, we obviously of having an excellent year in our golf equipment.
Segment, we had about 100 million.
Dollar inventory.
Fill in last year that we've talked about AD nauseum.
It doesn't repeat this year. So we had to cover that and we're doing a pretty good job of that and growing share and our forecast for the year remain unchanged.
No that's certainly helped.
Sorry go ahead, yes.
Yes, just.
Tim mentioned this growth in the second half of a period over period quarter over quarter. Most of the growth will occur in the Q4.
Again as chip mentioned it can move depending on.
Timing of shipments but.
Definitely heavily weighted to Q4.
Perfect. That's really helpful best of luck going forward.
Okay. Thanks, Alex.
Our next question comes from Daniel <unk> with Stephens, Inc. Please go ahead.
Yeah. Thanks, Steven Thank you for your questions.
Also on top off as well continue the trend.
Obviously same store sales moderated sequentially moving to follow up on Randy's question could you just give the actual numbers or detail on traffic versus ticket growth and then when you look at the top golf slowdown.
How do you think about the risk of other leisure activities, whether it's pickle ball or travel or movies is that taking traffic or where are you guys monitoring any data around like competitive just uses of that leisure time.
Or what are you seeing in terms of that when you look at the slowdown in sales.
Well, Daniel unless pickle ball and.
The movies are taking away corporate events.
I don't think Theres any data that suggests that it's having much impact on us.
The.
At the same venue sales is.
Again.
Apologize, it's very strong on the consumer side of the business and resilient.
There was no change in trend.
Cross the quarters.
The.
We feel very good about that the pickle ball is obviously growing from time to time, you'll have a movie that comes out we do compete against consumer activity pick up all its not a new trend.
And we have been growing.
<unk>.
Our business and our brand for seven.
Seven consecutive quarters as a matter of fact, so we feel good about that.
I also think Daniel that people on average only go to top golf unit, one five times a year. So it's not something Youre doing every week did now they want to go do pick a ball when they have to replace it.
To say with the rotation of other activities that they want to do.
And Daniel Steer me if I didn't answer the question completely and I can provide any further value there but.
Oh are you asked about specific traffic versus price sorry, and.
The.
I can give you just gender.
General.
In the quarter.
Because of events the total traffic was down a little bit.
But the traffic was up nicely in the consumer side of our business and.
For the full year, we expect it to be a mix of positive traffic.
And spend per visit with majority being spend per visit but we're going to contribute 20% to 25% of our.
Same venue sales growth through traffic.
Yes. Thank you for all the detail and then I'll follow up on top golf I guess, you mentioned, obviously corporate is the weak spot here and that same sounds specific but if we look at pre Covid I think corporate was 30% of total top golf revenue, but that was very <unk> weighted and so I guess, we're staring down the back half that has a much higher mix of corporate revenue historically.
Corporate is the weak spot in top golf right now.
No Brian walk through a few points of maybe what's going to drive the acceleration into <unk>, but maybe can you just help investors bridge that gap.
What you guys see to give you confidence in the improved sales given the corporate uncertainty were seeing.
Okay. So let me just correct a few numbers for you to start with Daniel because Youre Directionally correct, but.
The numbers were.
Slightly inaccurate.
Corporate since we're saying that specifically is on average 21% of our total.
This in the venues for the full year.
In Q4, it is roughly 28% so maybe for Q4, you can round to that 30.
28 would be a more precise.
Number.
And we obviously as we go through our we've got pretty good.
Visibility on what the corporate trends have been.
We have factored them into our guidance as best we can and giving you is what I think is a walk.
On some of the other factors.
So I'm not sure if I can add too much more color.
Right now in terms of.
We prefer not to get into specific estimates by <unk>.
Sub category.
Hi.
Quarter and I'm sure you can understand why.
Absolutely I'll hop back in queue. Thanks for the color.
Our next question comes from Noah Satkin with Keybanc capital markets. Please go ahead.
Hi, Thanks for taking my questions.
Maybe maybe switching gears to apparel.
Just hoping you could provide some color both on inventory levels in channel health, along with the level of promotion Ality Youre seeing in the channel and then I guess relatedly within active lifestyle strong gross margin improvement in the quarter, hoping you could help bridge to the EBIT margin pressure you saw and then just any color on how we should think about margins they're moving.
Through the back half thanks.
Okay.
Brian I'm going to throw that margin one year away. So I don't know, whether we have anything on that at this point, but in.
In terms of the the field inventories and inventory levels in general.
It's a little bit of the same story in golf equipment, but it's going to take a little longer as the long and short answer of it so inventories build up.
In the field over the 2022.
Our in process of correcting we had a strong sell through quarter for our brands.
We feel like we're in good position.
At or ahead of our plan from that basis.
It's a little more promotional than it was.
Well, it's a lot more promotional than it was in 'twenty, one and 'twenty two and there were no inventory and nobody promoted anything, but it's I wouldn't call it highly promotional right now and.
We feel good about those trends.
Brian do you have any color for the margin expectations for the balance of the year.
What you might be seeing now is just a little bit noise between the quarters because Q1.
Had stronger volume.
And then Q2 and it's another one of those Covid quarterly comparison issues, because our supply chain corrected this year.
So we shipped the product when we're supposed to ship it which was Q1 last year, we shipped a lot of it in Q2, because we couldnt get it.
And so now when you compare the quarters.
Q1, and Q2 look loyalty if you look at the half it looks pretty solid and it's very representative and.
On track our trend for our plan there.
Yes.
So.
For the second half, we would expect it to be up so the trends as chip mentioned is pretty good. If you look at the half the first half within second half and we get we're going to continue to get some benefits from.
The.
Freight and then also from FX and that will help those as well and just the continued sales growth in the back half.
Thank you very helpful.
Thank you.
Our next question comes from Brian Martin with Taylor with Raymond James. Please go ahead.
Hi, This is Martin on for Joe <unk>.
We see your commentary about the ramp up for Q3.
<unk> got into this a little bit softer than what the street expected I was wondering if you can give a little bit more commentary around that thank you.
Martin It's hard for me to comment on what the Street would have expected because the street didn't have any of the information that we had in terms of actual.
The results so.
I think it's pretty logical and believable.
When we look at how it ramps.
Based on the actual facts so.
I guess.
The purpose of these calls.
Okay Fair enough and then there was a comment made on this earnings call and the virtual Investor day as well.
So youre opening the door for self financing for top golf venues I'm. Just wondering if you can get a little bit of idea. The reason that you are looking down that path and maybe what's been indications could mean.
Sure.
Sure. Thanks, Martin this is Brian .
We wanted to provide.
Flexibility to do so right now the right cap rates have been holding stable for us I know everyone else has been seeing a lot of increased interest rates, but they've held reasonably stable and I think there's a few reasons for that we tend to run a competitive process, we have more rights that have interest.
In working with Us now.
Venues have become more proven and are less risky to the REIT. So everything has been holding occasionally run into a site for whatever reason or it may not be interested or just to keep it.
Modest on the rates, we wanted to flexibility to be able to self finance if that proves to be economically feasible for us.
Great. Thank you that's very helpful.
Thank you.
Our next question comes from John David Kennon with TD Cowen. Please go ahead.
Alright, good afternoon, guys. Thanks for taking my questions.
Sure.
Brian just wanted to go.
To the Opex line.
Specifically, the deleverage that occurring on the operating expenses as a percent of sales I think it was about 400 basis points in the first half, but it would take.
Based on the Q3 guidance.
Probably have to have significant leverage by Q4 on this line how should we think about the balance between top line investing in top golf and that operating expense line, which seems to be driving a lot of the margin deleverage.
Yes, I think a lot of it is we've been talking about the labor marketing all year and how those comps get a lot easier in the second half I mean, it is significant if you look at it being.
It'll shift from being a headwind to a tailwind first half second half.
It's 4% to 500 basis points.
So you get that plus the improved profitability I mean, that's a significant lift there and I think thats, probably what youre seeing.
Okay got it just it just seems like in Q3, it's going to remain a pretty significant headwind just based on the EBITDA guidance. You gave for Q3 and then it has to switch to a pretty meaningful tailwind by Q4.
Yes, it does because a lot of the actions that will happen in Q3, and then it ramps towards the Q4.
Got it and then.
Is the.
The meaningful improvement in the EBITDA margin by Q4.
That being driven more by soft off or is it balanced between the golf equipment business on top off.
A lot of it is top golf are the things, we just mentioned plus the increase in same venue sales.
But there's also improvements in other gross margin the other business the gross margins as well.
Especially with the.
Second half product launch.
Foreign currency.
Right right.
It's all adding up to be a pretty nice improvement for the EBITDA margin.
Okay got it thank you.
Our next question comes from Michael Swartz with <unk> Securities. Please go ahead.
Good evening.
Just with regards to the full swing acquisition give us a little color.
Just the background on that acquisition and what it provides you and then.
Not a material business in terms of revenue or EBITDA.
Hey, Michael Chip so.
Swing suites is it's more of a strategic acquisition than it is.
Financially material one so swing suites for those on the call that are not familiar with it.
Is.
A almost a lounge business that you would find at resorts and premium hotels. So you visit omni and its top golf swing suites, and then you'd see these.
<unk> you can go in and hit balls and play games and entertain and it has the top golf brand on it but it wasn't it was a business that we had had prior to the merger.
The.
The previous owners had.
Licensed out long term license to full swing and so it wasn't being controlled by <unk>.
Top golfs.
A nice business. It has our brand on it it has some good long term potential, but it's a small business, it's roughly on a GAAP basis.
$5 million in revenue.
So very small there it'll.
It will be accretive from a cash basis about $2 million.
Starting next year it'll be accretive this year, but I'm, giving you annual numbers here not partial year numbers.
So not a material business, but are strategically very attractive one part of the brand something we do think we can grow.
And something even potentially more importantly.
We wanted to control given.
How.
Positively we feel about the top golf brand in the long term potential there.
That's helpful.
Brian with regards to the free cash flow improvement in the back half of the year.
Part of that is working capital.
<unk> down inventory in the <unk>.
Products business.
Given the fourth quarter launch agent should we expect.
Inventory to come down more materially over the next few quarters relative to the 120 in the first half.
Well, it's come down a significant amount and then you have to remember towards the end of the year, we will start ramping up for the launches next year. So you have to build that into it but that will be next year's launch in next year's product, but this year. It will continue to come down but there is usually less sales less sales in the second half of the golf business anyway.
But it will be in good shape by the end of the year I.
I guess, that's the bottom line, our inventory will be in great shape and all current.
Okay.
Thank you.
Our next question comes from Eric Wold with B Riley Securities. Please go ahead.
Thanks. Good afternoon, just one question I know that some guys look back.
You started your guidance you raised a little bit Q1 <unk>.
Reaffirmed it.
On this call, but it looks like a lot of the confusion has been around kind of the quarterly cadence.
Given a number of wonky comparisons to last year.
Omicron demand.
Golf equipment catch up the weather shutdowns in Q4 I guess.
Obviously.
Four months left in the year, assuming nothing wonky happened much more months does that kind of normalize everything.
Next year's quarterly cadence should be normal does not assume any weird comparisons maybe certain quarters.
Okay.
Eric This is chip the short end.
The answer was.
Obviously fingers crossed is yes.
What we had a decision to make at the beginning of the year, which do we start comparing against 2022 numbers. Because 2019 was so long ago and we made the obvious decision, which is probably the only decision to do that.
But it has a lot 2022 still had a lot of COVID-19 and.
What we will call one time.
Noise in it.
This is not fundamental to our business.
<unk> really impact long term.
But we had these inventory catch ups and inventory shortages in.
Periods, where.
Covid was impacting consumers at top golf.
<unk>.
So there's bear with us as we get through it in the balance of the year and yes, it should be clean.
Cleaner going forward.
No that's perfect I appreciate it thanks, Jeff.
Our next question comes from Casey Alexander with Compass Point Research <unk> trading. Please go ahead.
Yes. Thank you and then I think theres been pulled apart in about every way possible so far but.
The discussion of cash flows.
You should turn positive for top golfs at the end of the year is obviously, a big swing the adult business has always generated nice cash.
What kind of cash flow range are you thinking about for 2024, and what would you like to do with it.
Hey down debt and if so what's kind of a net leverage ratio that you'd like to get it tail on.
Like a normalized basis.
Hi, Casey.
Brian we're not going to provide guidance at this point on cash flow for next year, but we agree that it will generate.
Significant cash flow.
As far as what we deal with it.
Paying down debt and obviously investing back into business as our primary when we do but we have plenty of availability at this point, so we'll monitor it and we'll balance it between investing back into business.
Making sure our leverage ratios are on track to decrease I mean longer term, we want to get below three times.
And then a balance between returning capital to shareholders and.
No.
Other investments small investments.
Alright, thank you.
Thank you Casey.
This concludes our question and answer session I would like to turn the conference back over to chip Brewer for any closing remarks.
Well. Thank you everybody for dialing in and we appreciate your participation and questions and we'll look forward to.
Yeah.
Engaging with you.
Post call where appropriate and.
We look forward to continue to update on our journey.
I do want to say I am very pleased and I believe that the business is continuing to strengthen as fundamental economic engine and I hope that came through in our comments. Thank you for your time.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.