Q3 2023 Topgolf Callaway Brands Corp Earnings Call

November 8, 2023

[music].

Welcome to the top golf Callaway brands third quarter 2023 earnings conference call.

All participants will be in listen only mode.

Did you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.

After todays presentation, there will be an opportunity to ask question.

Please note this event is being recorded.

I would now like to turn the conference over to Katina met the Corker voice.

<unk> President of Investor Relations and corporate Communications. Please go ahead.

Thank you Andrea and good afternoon, everyone welcome to top golf Callaway brands third quarter 2023 earnings Conference call I'm Katina bunch of Doc as the Companys, 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.

Sir.

Earlier today, the company issued a press release announcing its third quarter 2023 financial results. In addition, there was an updated presentation with supplemental information that we have not shared in the past and may make it easier for you to follow along with this call.

Cause we were introducing some new concepts and metrics, we will plan to extend todays call to give additional time for a question and answer session.

This earnings presentation as well as in 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've reconciled the non-GAAP measures to the corresponding GAAP measures at the back of the presentation in accordance with regulation G. Please note that the call will include forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations.

We encourage you to review the Safe Harbor statements contained in the presentation and the press release for a more complete description.

And with that I'd like to turn the call over to chip. Thank you Katina and good afternoon to everyone and thank you for joining us today.

Despite some volatility in top golf same venue sales Q3 was a strong operating quarter.

The team delivered solid results across all segments of our business and expect to deliver mid single digit growth in revenues and EBITDA for the full year.

We are confident we will be free cash flow positive this year.

And have now begun to reduce our financial leverage.

As we look across our business. We are encouraged by the fact that our golf consumer remains strong.

As does the Callaway equipment brand and product pipeline, our active lifestyle segment continues to deliver growth in top line and operating margin.

And then top golf our confidence on venue economic returns remains very strong we are delivering a compelling unit growth plan with new venues opening well and our venue margins continue to improve and impressive and important proof point as this was delivered during a challenging same venue sales environment.

Yes.

Unfortunately.

Our near term sales in our venues as well as current foreign exchange rates resulted in lower forward projections at this time.

As you would expect we don't take these changes lightly and we do not intend to make a habit of them.

Excluding 2020 this will be the first full year earnings guide that we have missed in my 11 plus years of running this business.

The teams quickly recognize the changing conditions and are now taking swift and decisive action to reduce cost capture further synergies and drive improved profitability.

With these changes we believe we have identified a clear path to derisk, our operating plans through potentially softer consumer environment, while maintaining both strong growth and positive cash flow.

Given our strong financial resources and businesses that are well positioned for long term success, we remain strongly confident in our growth algorithm and the direction of our business.

Let me now walk you through our business segment performance in Q3.

I'll begin with top golf.

Starting with the three key performance drivers for our venue business than your development same mid <unk> sales growth in venue margin expansion.

We successfully opened four new venues thus far in Q4 included including St. Louis Midtown Memphis, and our first two venues in new England in Canton, Massachusetts outside of Boston, and Cranston, Rhode Island outside of Providence.

With seven venues opened year to date top golf remains on track to open 11, new venues in 2023.

As usual the new venues are performing well.

While we're on this subject I want to provide an update on our acquisition of big shots from invited the largest private golf and country club owner and operator in North America, and a key strategic partner of top golf Callaway brands.

As part of this strategic transaction, we acquired the largest active competitor to top golf, including one new owned and operated venue.

Two franchisee relationships covering three venues, which we expect to convert to top tracer counts in the near future.

And enhanced and Derisk future pipeline as we will now assume big shots pipeline, some of which overlapped with ours.

Along with the preferred vendor agreement in which top golf Callaway brands merchandise, including Callaway Travis Matthew in Ocho product will be prominently featured at invited more than 140 golf and country clubs.

All for approximately the same price of building a single top golf venue.

With the venue acquired through this transaction and the potential to add one additional venue in the first half of next year.

We plan to build only eight to nine additional new venues in 2024.

This change along with the strategic assessment, and resulting tightening of our other capital expenditure plans.

Will save us approximately $100 million in planned capital over the next two years.

This will improve our already positive cash flow and accelerate our expected debt paydown schedule. It.

It will therefore, derisk our business over the near to medium term something we believe some investors will appreciate.

Consistent with previous communication, we maintain high confidence in the venue returns, which remain at an 18% to 22% return on gross investment and a 50% to 60% cash on cash return.

Just on targeted year five results.

And thus we expect to resume building approximately 11 venues per year again in 2025.

Our projections support this new capital allocation plan is the best way to drive shareholder value.

And we believe we have more than enough capital available to support this growth plan.

However, if business conditions necessitate it we can pull back on these investments and all stakeholders should be confident we would do so.

Moving the same venue sales.

These were down 3% in Q3 due to weaker than expected demand along with extreme heat that impacted our venues located in southern markets, including Texas during a portion of the quarter.

Our consumer or one to two bay business, which as a reminder represents approximately 80% of our total business on an annual basis.

Was flat versus last year and remains up nicely versus 2019 levels.

Our corporate events business declined approximately 17% year over year in Q3.

As we continue to lap the post COVID-19 surge in demand we saw last year.

That said the corporate events business appears to have stabilized during the quarter.

And the two year stack using 2022, and 2019 was still up 4%.

This two year stack chart is included in our Investor presentation on page four I believe it provides a helpful way to look at the performance year to date.

As it shows the lapse, we are anniversarying and that the business remains up nicely versus pre COVID-19 on a two year stack basis.

Looking forward on the same venue sales.

After improving in September or October results softened overall.

But interestingly, we see a consistent trend of sales remaining strong on the weekends as well as on Tuesdays, where we offer half off game play.

The lower same venue sales, we are seeing is largely confined to our events business as well as Monday, Wednesday, and Thursday, where we are not providing either value or a special occasion.

As you'll hear in a moment this difference by day of the week is instructive for action plan.

And the fact that the events business is stabilizing as important for forward projections.

But before I go there, let me unpack the Q4 forecast.

For Q4, we're now forecasting corporate event demand down low teens year over year, which is consistent with actual current booking trends and would result in a two year stack of approximately flat for this portion of our business.

This decline is less than the corporate was down in Q2 and Q3 as we continue to see the business stabilizing.

However, corporate is a higher percent of the sales mix. This quarter. So it is more impactful to the total.

We are forecasting the consumer portion of our one to two bay business down low single digits versus last year for Q4, thus, reflecting the results we saw in October.

With this forecast our two year stack for consumer would be up high single digits versus 2019, as the consumer portion of our business, although slowing some remains healthy versus historical levels.

As a result, we're now guiding to down mid to high single digits for Q4 and slightly down for the full year, but please note that both of these are up nicely on a stacked basis.

Moving to what we're going to do about it.

Given the day of the week trends and also believing that in the current environment consumers are being offered and are probably looking for greater value to attempt them out during the week.

We are immediately doubling down on communicating our Tuesday value offering.

And in test markets, we will be trialing additional value offerings aimed specifically at Wednesdays and Thursdays.

We're also going to ramp up our cross brand synergies by promoting top golf offers to both Callaway and Travis Matthew loyalists.

In this clearly choppy environment, one of our relative strengths is that was expanding venue margins and minimal current promotional activity, we have room to implement new promotions and still deliver strong four wall returns that our venues.

Furthermore, our recent digital efforts enabled us to effectively target specific segments and days of the week.

Speaking of digital I'd like to thank and recognize the top golf team for the significant progress, we're making here and at the same time I'm energized by the large runway for continued growth and improvement in front of us.

The venue business ended Q3 with a total digital sales mix of nearly 36% up from 34% in Q2, and only 5% pre merger. We believe our long term digital mix will be 60% or higher and we set a strong foundation for this with the implementation of Pi.

Our Bay inventory management system, which is now in all of our venues except for Las Vegas.

The next chapter for Pi involves more efficient stacking of our reservations to maximize utilization and offering more options on the length of the reservation versus the standard to our option we offer today.

This will effectively create more available inventory during peak hours provide more value to the consumer and more profit opportunity.

And as more of our business is sold through reservations were working on further product innovation to offer add ons and up sell things like food and beverage packages.

Better Bay, our Florida location potentially some services like introductory lessons and maybe even upgraded equipment.

Moving onto our third performance driver venue margin expansion.

The team just did an outstanding job here during Q3.

The initiatives the team had been working on such as pie as well as labor and Cogs optimization paid big dividends this quarter and as a result, even with same venue sales below expectations and clearly a challenging operating environment, we were able to deliver EBITDA margins in the mid thirties and approximately two.

100 basis points above last year.

This should provide confidence both in our ability to deliver margins in tough environments.

And in our ability to hit our 35% full year venue EBITA margin target by 2025, if not sooner.

Shifting gears to top tracer golf's number one range technology is on pace to open just over 7000, new base this year consistent with expectations.

Market feedback and demand remain positive.

Moving to our golf equipment segment, we're pleased with our results, which were largely in line with our expectations.

We're also pleased to report that the U S golf consumer remains strong and engaged as.

As evidence of this U S rounds played or up approximately 4% year to date through September.

The Callaway brand continues to deliver excellent performance in both brand rating in market share in the U S. Callaway is the number one market share brand year to date in total woods Irons fairway woods drivers and hybrids.

And it maintains its brand leadership position in technology and innovation.

Our paradigm driver has also had the most wins across worldwide tours, and we continue to grow our position in ball with market share sustaining approximately 20% sales up 7% year to date and an exciting new premium ball launch coming early next year.

Turning to Asia, we have seen some softening in those markets during the second half of the year, but our business. There is up for the full year on a currency neutral basis, and our brand position and market share remains strong.

That said in reaction to the change in market conditions, we are lowering our sales and margin estimates for Q4 for this region.

At this point, we do not see this as a significant concern for 2024, just something that bears mentioning and watching.

In the U S field inventories in golf equipment remain in line with expectations as does the promotional environment overall, a healthy market.

Just last week, we launched a new exciting powder Odyssey AI, one featuring a revolutionary new insert that our testing shows delivers up to 21% better distance control on putting.

<unk> already made its way into the bags of players like John ROM, Sam Burns and Brian Lynch.

We're excited about this new product and invite you to visit our website to see it for yourself.

Looking further ahead enthusiasm for and feedback from our recently completed 2020 for product sales meetings and pre lines with key customers have been very promising and I look forward to providing you with updates on our upcoming product launches next quarter.

Lastly, as you think about our golf equipment business going forward I'd like to remind everyone of two important points.

First the golf equipment business has not historically been sensitive to mild recessions.

And secondly, our brand and management team have a nice track record of performance that meets or beats. The overall market something we expect to do again this year.

You can see evidence of both these points on slides seven and eight in the Investor day.

Moving to active lifestyle Travis Matthew continue to grow its top line by double digits, driven by continued brand momentum and new store openings. The growth here is bolstered by progress, we're making on our new women's line, including a small but successful introduction of the line at nordstrom's.

Jack Wilson also posted encouraging results in the quarter with solid growth. Despite a choppy macro environment in Europe and the brand remains on track for growth in both revenue and profits in 2023.

Now looking forward, let me briefly unpack the changing guidance, we're revising the mid points of our 2023 revenue and EBITDA guidance to $4, two 5 billion and 580 <unk>.

Respectively.

The revision is primarily due to the lower same venue sales at top golf.

The slowing business conditions in Asia, and the foreign exchange rate movements since last quarter had contributing but smaller impacts.

As mentioned, we continue to expect to be cash flow positive. This year, both at the corporate level.

And a top golf.

With the above revisions. We've also done a thorough business review and refocus spend on our biggest strategic priorities as well as accelerating synergies lowering operating expense, including head count reducing capital expenditures and developing more growth initiatives.

Across Opex and gross margin, we expect to realize savings of approximately $45 million per year.

And as previously mentioned, we are reducing our planned capex spend by approximately $100 million over the next two years.

These actions are aimed at derisking our forward forecast.

Looking further forward, we're moving our target of at least $800 million in EBITDA from 2025% to 2026.

The primary driver of this move as foreign exchange rates as there is now a $165 million revenue headwind and close to $100 million EBITDA headwind.

As the rates we used in early 2022.

And this along with the economic trends. We are currently experiencing make this move appropriate at this time.

To help better forecast our growth and cash flow. We're also introducing two concepts that were suggested to us by investors.

The first of these is EBITDA less cash than you financing interest.

This calculation avoids the complication of us, having both operating or finance leases by reducing EBITDA by the cost of both.

It essentially captures all cash payments that resemble rent.

Which is a reasonable way to look at the business both from an EBITDA and a leverage perspective.

The second is embedded cash flow, which is free cash flow before growth capex or what our cash flow would be if we didn't continue to add new venues of retail stores.

Embedded cash flow is what's available to either reinvest in future growth or return to shareholders.

In conclusion and looking ahead.

Top golf Callaway brands had strong underlying fundamentals robust financial resources and premium brands that have clear defensive moats, both individually and collectively.

We operate primarily in the arena of modern golf.

An attractive and growing market that benefits from positive long term trends and structural growth.

We're now making the important transition to the cash generation period over economic journey.

And although we are experiencing some short term volatility. We're also taking steps to make sure. We both stay cash flow positive and deliver strong growth going forward.

As I look forward I remain confident in our outlook.

And that our structure provides us both synergies and a long term competitive advantage.

I'll now turn the call over to Brian to provide detail on the financial side of our business.

Thank you chip and good afternoon, everyone.

Overall, we are pleased with our third quarter results, including our ability to deliver higher than expected EBITDA on softer than expected revenue.

This is in part attributable to top golfs continued improvements in venue profitability as.

As well as its management of labor costs.

In preparation for potentially softer market conditions, we have taken action to reduce planned capital and operating expenditures, while maintaining our long term growth plans.

Our financial position remains strong.

Our available liquidity, which is comprised of cash and borrowing capacity under our credit facilities.

Has increased this year from $415 million at December 31, 2000, $22 million to $734 million of September 32023.

This is in large part due to the refinancing and additional borrowings we completed earlier this year.

We remain focused on generating cash flow and managing leverage and have the flexibility to further reduce costs and cash outlays if necessary.

Now moving to Q3 results.

In the third quarter revenue increased five 3% year over year to $1.04 billion.

Which is about $9 million or a little less than 1% below the low end of our guidance range.

Revenue increased versus Q3, 2022 was driven primarily by growth in top golf as well as Travis Matthew and Jack will scan.

The majority of the shortfall versus our Q3 guidance.

Attributable to an approximate 3% decrease in same venue sales at top golf.

Below our guidance of 1% to 3% growth.

Q3, non-GAAP operating income increased five 1% to $85 million consistent with our revenue growth.

Q3, non-GAAP net income decreased $6 $4 million year over year.

Primarily due to a $17 million increase in interest expense.

Related to higher interest rates additional term loan debt and increased venue financing interest.

Adjusted EBITDA of $163 million increased 13% compared to last year and.

And exceeded the high end of our guidance range by approximately $9 million.

Due primarily to continued venue margin expansion and reduction in planned operating expenses.

Turning to segment performance.

In Q3 top golf revenue increased 8% to $448 million driven by the addition of nine new venues since Q3 2022.

And partially offset by a decline of approximately 3% and same venue sales during the quarter.

<unk> segment operating income increased 65% year over year to $39 million and.

<unk> EBITDA increased 42% to $91 million due to the increased revenue and continued venue margin expansion.

The recently announced <unk> acquisition is expected to be slightly accretive to top golf in 2024 and growing thereafter.

This was both a strategic transaction and attractive from a financial point of view, but small on a relative scale basis.

Our golf equipment segment results exceeded our revenue and operating income forecast.

Golf equipment revenue declined 1% to $293 million.

Primarily due to an expected shift in equipment launch timing from Q3 to Q4, this year and softness in Asia as well as a 5% decline in golf ball sales.

Due to the retail channel inventory catch up in golf balls in Q3 2022.

Yeah.

Golf equipment operating income was $35 million, a decrease of $14 million compared to the prior year.

This is due to less launch product in Q3, this year versus last year.

A return to normal promotional levels and.

And lower production volumes this year versus 2022, and thus less fixed cost absorption.

The active lifestyle segment grew 8% to $300 million driven by continued strong double digit growth of Travis Matthew and solid growth at Jack Wilson.

Operating income increased approximately 42% year over year to $40 million driven by a higher mix of margin accretive director consumer sales as well as tailwind from lower freight costs.

Moving to our balance sheet.

As mentioned earlier as of September 32023, we have available liquidity of $734 million.

Based on our modeling we believe this liquidity position is more than sufficient to execute our business plan, even if the market soften further.

At quarter end, we had total net debt of $2 1 billion.

Which excludes convertible debt of approximately $258 million.

Compared to $1 5 billion at the end of Q3 2022.

This increase relates primarily to incremental new venue financing and the additional $300 million of term loan debt.

Excluding the venue financing REIT debt net debt is $1.06 billion at the end of Q3 2023 versus <unk> $74 billion at the end of Q3 2022.

Our net debt leverage which excludes the convertible debt was three eight times at September 32023, compared to four one times at June 32023.

The quarter over quarter improvement was driven by the increase in EBITDA and improved cash position.

Internally, we find it helpful to look at our net leverage by excluding the venue financing REIT debt.

That is essentially an interest only loan with no principal repayment required.

The interest payments are akin to rent, but accounting rules classify them as interest.

When the venue financing reap that is excluded from debt and the corresponding repayments burden ebitdas rent payments.

Our net debt leverage ratio is two one times.

We continue to review rights as a capital efficient way to finance our venues.

Interest among reach to partner with top golf remains strong and we have signed leases or letters of intent in place for the venues and our 2024 pipeline that are intended to be refinanced with cap rates holding steady and in line with our expectations.

There will be instances in the future, where we choose to finance the venue here or they are using our term loan debt and there's generally no difference in cash flow or the resulting net debt at the enterprise level.

Switching gears to working capital consolidated net accounts receivable was $305 million at the end of Q3 2023 compared to $270 million at the end of Q3 2022.

Non top golf days sales outstanding increased slightly from 52 to 54 days.

Our inventory balance decreased $222 million from $959 million, a year end 2000 $22 million to $737 million in Q3 of this year.

This is in part due to seasonality, but also the teams concerted efforts to reduce inventory following the post covered surge last year.

Inventory is expected to increase in Q4 due to normal seasonality as we prepare for new golf equipment product launches in 2024.

But it will still be significantly lower than at the end of 2022.

We expect inventory to decrease further in 2024 is our apparel business is normalized their inventory.

We are pleased with the overall reduction in inventory and the quality of our inventory remains good.

Capital expenditures for the first nine months were $389 million and we received reimbursements of $188 million for net capital expenditures of $201 million.

Of which a $152 million is related to top golf.

For the full year, we expect total capex of approximately $240 million.

Net of expected reimbursements, including $175 million for topped off at.

At $30 million reduction from our previous 2023 guidance.

We've included on Slide 16, our presentation today and estimated detailed breakout of the Capex for 2023, and Capex assumptions going forward.

Now moving to our outlook.

As I mentioned earlier, given the trends we are seeing a top golf in Asia and with foreign currency exchange rates.

We are lowering our full year 2023 revenue guidance range to $4, two 4% to $4 billion to $6 billion.

Which at the midpoint would still represent 6% year over year revenue growth versus 2022.

We are lowering our current adjusted EBITDA guidance range to $575 million to $585 million.

Which at the midpoint represents 4% year over year growth.

Most of the reduction from the prior forecast is related to Taco.

At the top golf segment level, we are lowering our full year revenue guide to approximately $1 75 billion for the year or 13% growth versus 2022.

Same venue sales is now expected to be down slightly versus prior year.

Stopcock EBIT guidance is also being lower range of $280 million to $290 million.

Which at midpoint represents 21% growth versus 2022.

This reduction is attributable to the current trend in same venue.

With regard to Q4, we still expect to grow revenue and adjusted EBITDA in the fourth quarter.

We are estimating revenue of $847 million to $872 million, which at the midpoint represents 1% growth versus the prior year.

The top graph, we are estimating Q4 revenue to be approximately $423 million.

Which would represent 4% growth versus 2022.

The top graph increase is expected to be driven by new venues, partially offset by a mid to high single digit decline in same venue sales compared to 2022.

We are estimating consolidated Q4, adjusted EBITDA in the range of $48 million to $58 million, which at the midpoint of guidance would represent 45% year over year growth.

The top graph, we are estimating Q4, adjusted EBITDA of approximately <unk> $49 million to $59 million.

Third to $43 million last year, a 25% increase.

An important takeaway from our Q3 performance in Q4 forecast, let's say were able to grow adjusted EBITDA even in challenging conditions.

We have pushed out at our Investor day goal of at least 800 plus million dollars and adjusted EBITDA by one year to 2026.

Foreign currency exchange rates have moved dramatically since that time the change in rates had over a $165 million negative impact on revenue and close to $100 million impact on EBITDA. Since then.

While our over performance had been covering the foreign exchange negative impact to foreign exchange impact combined with softer market conditions. This is causing us to push that go out a year.

Chip mentioned, we are also providing today additional information about cash flow, including a new term we call embedded cash flow.

Embedded cash flow is free cash flow less growth capex.

For these purposes growth Capex is limited to new venues and new retail stores.

We think it is an important because it reflects the cash flow generation power of the current business.

Investors can then separately evaluate whether our investment of that cash flow and growth capex as a good investment.

We believe this is a better way to evaluate the company is to date a significant investment in growth Capex may have overshadowed the cash generation power of the current business.

It also has the benefit of eliminating some of the noise related to the timing of reimbursements that can affect free cash flow on a quarterly basis.

On slide 17, we provide a detailed breakdown of estimated cash flow for 2023 and assumptions for future cash flows.

The short answer however.

And so we would expect to have approximately $150 million and embedded cash flow this year and growing to approximately $325 million in 2026, when we expect to have over $800 million and adjusted EBITDA.

Thereafter, we would expect even better free cash flows to grow impressively at least 25% per year.

Furthermore, as top golfs EBITDA less cash venue financing interest starts to meaningfully outpace its capital requirements in 2026.

We would expect to see meaningful growth in EPS at that time, especially as the incremental cash flows are used to pay down debt and reduce interest expense and the relative pace of increase in depreciation and amortization expense slows.

In 2024, however, given the current phase of the top golf growth cycle.

<unk> is forecasted decline because <unk> growth in DNA and venue financing interest will be $85 million headwind in 2024.

In addition at current rates, we expect to have a $30 million headwind from foreign currency translation and hedge gains in 2023 that are not assumed to repeat in 2024.

EPS should grow in 2025 off of the 2024 base and then ramp from there.

We're providing greater detail on all of this in our Investor presentation on slide 17 to 19.

For those interested we are also provided in the appendix to the presentation and illustrative walk a venue for wall EBITDAR margin to total top golf segment level adjusted EBITDA.

I know we've covered a lot today and thank you for your patience.

As you all well know companies go through varying economic cycles over time.

The favorable conditions are certainly more enjoyable, but the strong companies that remain flexible can prosper in challenging conditions as well.

I believe we are in the process of proving that we are.

Demonstrating revenue and EBITDA growth during softening conditions.

We are taking action to manage costs and we have sufficient liquidity not only to endure softer market conditions, but also to continue our growth plan.

While we continue to monitor market conditions and adjust as necessary our fundamental growth algorithm remains intact.

We are also at an important inflection point in our top golf journey.

First phase after we merged was an investment phase that required us to provide funding to accelerate growth through additional venue development.

This phase resulted in rapid EBITDA growth, but with a negative impact on earnings per share and leverage due to the increased interest and depreciation and amortization expense associated with such investment.

This phase was very successful we significantly increased the number of new venues developed and at the same time increase the profitability of the venues, resulting in the rapid EBITDA growth.

We are now in phase II and expect to be in it through 2024.

During this phase top golfs cash flows increase earnings per share stabilize and leverage begins to gradually decrease.

Thereafter in phase III top golfs cash flows accelerate as its cash flow begins to meaningfully exceed its capital requirements, allowing the company to pay down debt and increase in earnings per share as well.

To conclude by way of a brief summary.

First we are demonstrating our ability to grow EBITDA under current conditions.

Second we have a solid financial position and sufficient liquidity to execute our growth plans.

And as Chip mentioned, we are taking action to reduce costs and reduce costs in preparation for potentially softer market conditions, including approximately $45 million in cost savings across Cogs, and opex and close to a 100 million dollar reduction in planned capital expenditures.

And third our long term growth algorithm remains intact and we are more than one year ahead of plan at the time of the merger.

As a result, the total company will be free cash flow positive this year and top golf is expected to be free cash flow positive this year as well assuming receipt of all the REIT reimbursements that are expected by December 31.

We have made great progress and have a clear path to further growth.

With that said operator, we can now open the call for questions.

We will now begin the question and answer session.

To ask a question.

Then one on your Touchtone phone.

You are using a speakerphone please pick up your handset before pressing the key.

Withdraw your question. Please press Star then two.

In the interest of time, we ask that you. Please limit yourself to one question and one follow up.

At this time, we will pause momentarily to assemble our roster.

Okay.

And our first question comes from Matthew Boss of Jpmorgan. Please go ahead.

Great. Thanks.

So maybe just start off chip.

Is there a way to break down the 500 basis point same store sales Miss versus planet top golf this quarter, maybe how much was macro how much was execution and then if we look at current business. What is the trend line that you've seen in October maybe relative to the negative mid to high single digit comp guide.

For the fourth quarter.

Sure Matt.

So if you look at Q3.

We provide you the.

Two year stacks on page four of the investor deck and.

Yeah.

We saw a couple of different things in Q3 relative to our expectations. We saw you know.

A little bit softer business, both on the corporate side and on the consumer side than what we expected.

And we also saw some.

Extreme heat throughout the southern markets, where the same venue sales in the southern markets were significantly lower than the same venue sales in the northern markets and we skew towards southern markets.

For your information during a big portion of the quarter, primarily in August with a little bit of shoulder around that.

And that's in essence, what we saw during Q3.

September picked up a little bit versus August but.

The general trends are covered there.

Then in <unk>.

October after it picking up a little bit in September we saw it dip down a little further and what we're projecting in for the quarter is consistent both with what we actually saw in October.

And.

What the corporate bookings are showing us quarter to date, so we're using.

The actual results to do that forecast and.

We are encouraged by the fact that we see the corporate side of the business stabilizing.

We are encouraged by the fact that the consumer side of our business remains very strong on a two year stack basis.

And we're also encouraged by the fact that the business remains strong on weekends and on Tuesday. So the nature of the issue is really confined to a really a post COVID-19 surge that occurred in corporate events and that is.

Stabilizing and we're working our way through that.

Rationalization and then.

A little bit of slowness that we're seeing on the consumer side, that's during the really Monday Wednesday, and Thursday, So we'll be targeting that specifically.

Great and then Brian just could you outline the EBITDA margin expansion drivers in the fourth quarter. Despite the softer revenue outlook and on the cost side could you just elaborate on the expense savings identified today and the cadence of flow through from here.

Sure I'll take the second one first.

The cost savings are really it's the employee and Cogs as a part of it and then just a reduction in normal operating expenses.

Unfortunately that included some personnel reductions.

And and include other SG&A costs consulting TNA, and so thats going into next year.

Then on the <unk> was the first question.

The drivers of the EBITDA margin expansion in the fourth quarter, despite the softer revenue outlook.

Great.

Yes, so a lot of it will still be.

Top golf outperforming.

With their venue margin Thats continue they continue to make great progress there, which is what allowed us to.

Exceed EBITDA.

By softer revenues.

And primarily that's the main part.

Yep.

Great Best of luck.

Yes.

The next question comes from Randy <unk> of Jefferies. Please go ahead.

Hey, good afternoon guys.

When I look at the guidance change I think the EBITDA dollars at the midpoint are down 8% stocks down 16% in the after hours and then when I look at the valuation implied even before the quarter print.

The stock multiple.

Seems very dislocated from our core PR that just as in the golf equipment space. So I guess when I when I look at that we think about how the market is voting.

Do you think about or how do you think about potential strategic alternatives or do you consider that at all.

How should we be thinking about that given the where we are with destock and how it kind of looks valuation wise versus peers.

And again, when you have a core business and callaway producing.

Solid numbers and good cash flow.

And then top golf is kind of weighing the business down with it I guess lack of cash flow. Even though you think you said, it's going to turn positive. This year. So how are we how do you guys think about that how should we be thinking about that.

In a nutshell.

Hey, Randy this is chip.

Obviously, a fair question and something that we give considerable thought to.

As you would expect we're always focus first and foremost on our primary day job of running the business executing the business strategy.

Trolling, what we control to increase long term economic value of the business, but at.

At the same time.

We recognize that as our fiduciary responsibility and just good business practice to regularly evaluate strategic options.

That could enhance shareholder value.

That includes the changes in portfolio, whether that be sales or spin outs et cetera.

We regularly do that we've done that we will continue to do it and.

We think that is right business practice, we do that with both the engagement of our board of directors and outside advisors. We also fundamentally believe our current structure provides us a competitive advantage.

And over the long term our financial performance, we will be showing that thus any strategic option would have to be viewed as superior to it but we absolutely do.

Do as a regular course of business engage in those strategic assessments using both board and outside advisors.

Got it and then my last question would be maybe give us some perspective on <unk>.

You've been in this business and this industry forever, you've been on the board of top golf for a number of years as well.

Maybe give us some perspective on what youre thinking about as it relates to the the golf equipment industry and its kind of outlook over the next couple of years based on your history in the industry on how that looks and then maybe contrast that or.

See how similar or different with top golf based on your extensive tenure at the board level with that business for a number of years now before merging with it. So just give us a flavor would be very helpful. As we think about your ramp.

Hi, thank too and I'm going to overlook the you've been in the industry forever comment.

It sounded a little bit like something to do with my age but.

Ah.

The golf equipment business in golf in general has never been healthier.

Can't be much more optimistic on the long term fundamentals of golf you can see it in every metric you can see energy and momentum around the game, you'll see structural growth you see.

More money being dedicated and invested in and around the game than you've ever seen you may see more diversity.

You never had off course golf in a significant way and now only top golf not just all off course golf only top golf will be larger than on course golf in the U S and so just fundamentally in a strong position our brands in a good.

Physician.

Obviously, there is some concern about the consumer out there we do not see any sign of consumer weakness in the golf equipment business and our brand strength and momentum feels very good to me so.

Very strong on that side.

And on top golf side, it's a lot of the same we obviously have some short term same venue sales volatility that we're working through.

As I have stated a lot of that is a post COVID-19.

Surge that was in the corporate and events side of our business that we're working through now if you took that out.

This would just be noise, and we would be nothing but strength and it shows on the same venue sales two year stack data.

And we clearly have the ability to.

We think address that and more.

Maintain our margins.

On top of that we're opening venue successfully we're increasing the margins of the business even in a soft environment.

And we beat our EBITDA numbers, despite the same venue sales Miss.

Pretty impressive.

So I feel very bullish about both of these businesses over the long term and.

We're going to do our best to.

And make sure that the market sees those.

Clearly as we as we deliver them.

Thanks, so much.

The next question comes from Daniel umbrella of Stephens. Please go ahead.

Yes, Hey, good evening everybody.

Maybe to continue on with top golf side, just as we think about what you just add the ability to deliver EBITDA on a tougher tougher top line I guess can you just provide more color and breakdown what the fixed versus variable cost side of the venue side is here, especially as we think about how long these negative comp trend could last trying I'm trying to get a better sense for what the cost.

It looks like they're at top golf and I didn't catch your answer to earlier question does the <unk> EBITDA guide include some of those $45 million of cost synergies that you quantified.

I believe we've.

The cost synergies will be primarily next year.

So.

But.

And in terms of the fixed versus variable, Brian or Patrick do you want to try to grab that one on the.

Top golf side. It's obviously, we've shown we can increase margins Daniel and.

We drove 200 basis points improved year over year margin and near in mid Thirty's EBITDA margins.

Out of.

Top golf and the definition of fixed versus variable is very dependent on time. So.

It can all be.

Other than the.

I'll ask that.

There's very little cash side that isn't variable over a longer period of time, but.

We believe that we're going to be able to continue to drive.

We're confident Daniel we're going to continue to drive profits out of these and we're showing that I don't know, we candidly what else we could do.

On that front labor expenses, a significant portion of their venue expense and a lot of that most of that is flexible righteously hourly workers. So they can adjust up and down as the.

The venue sale revenue goes up and down they can adjust and they do a great job of that was just one of the reasons, we've been able to grow the same venue margins, they're pretty good at that you saw that even during COVID-19 and different places like that they can reducing significantly faster and then and that's really where they're also making efficiency progress right. There just utilizing that labor.

Much more efficiently right. So if you look at that ability right that that is driving that.

Those abbott as to increase even though you have a negative same venue sales comp.

And then the Pi system and the last thing Daniel as we work around the room here.

<unk> is obviously, helping us drive the efficiency here, having that in all venues but.

Vegas.

That helps on multiple sides of the business, but will unlock continued efficiency gains you can see it in the data.

Through Q3 as it starts to percolate.

Through the system.

Understood and then maybe a follow up on the top golf consumer comp so that did obviously decelerate.

And you talked about kind of what Youre seeing is that manifesting just in fewer visits is it smaller ticket per visit like we're seeing a trade down with less food attachment or less spending when people come and then given that decelerating trend in recent months I guess can you just talk about the decision to guide based on October I again, I know weather comps get easier but.

The consumer keeps softening I guess.

How do you think about the risk to that consumer comp guidance for the fourth quarter that you guys again. Thanks.

Sure.

First question.

What we saw in Q3 was actually a slight increase in spend per visit and so most of the Miss was traffic.

The traffic is spread over corporate and consumer but traffic not spend per visit.

As mentioned on the weekends and on those Tuesdays are comps were up.

So.

This is.

Very isolated or targeted but.

We are aware of.

Softening trend.

I think if you had said that our comps were flat during the quarter, which is what our consumer comps would have been year over year and up 8% on a two year stack basis still seems pretty good to me, but you can I just encourage you to look at fully not just one way.

And what was the second part of the question again.

Just the risks as we see headline traffic slowing and it sounds like that's not incorporated in the guide kind of how you think about the rest of the guide if the consumer.

We did not forecast lower than what we're seeing but we're not seeing lower than what we forecast.

Alright understood I appreciate the color and best of luck.

Thank you.

The next question comes from Joe Albi Belo of Raymond James. Please go ahead.

Thanks, Hey, guys good afternoon.

With top golf not surprisingly.

Sure.

Yes, a good steady run rate.

Same thing in sales is.

Well, if we go back when you guys acquired.

The comps.

We're fairly anemic pretty low double digits.

And this is the biggest pushback that I get at least some from investors on the stock is.

What do you what kind of value that we ascribe to this business.

It doesn't comp so help me to understand what you think a normal steady state run rate is the same thing in sales.

Why would be materially higher than what we saw.

Tobey.

Well, we thank Joe that we can deliver low single digits positive comps over time.

There's going to be some volatility in those on a quarter to quarter basis, but.

We believe we can deliver low single digit same venue sales comps.

We believe there is momentum behind the game in the concept and we believe we will have scale advantages in terms of our marketing muscle. This is a concept that is not weakening.

But strengthening the.

The national presence that we will have and scale advantages and all of the other positive tailwind around.

Golf, including top golf.

And off course golf.

Are great indicators of that and.

The digital implementation that we are doing now will help unlock that as well back in the day. They were only 5% digital right. That's not how the consumer wants to engage we're scaling that theres just a lot of different areas that we are confident we will be.

Able to pull.

The levers on and drive further improvement in the business, but that's not the only growth driver here.

<unk>.

Same venue sales is important and we will deliver it.

But this is a multiunit venue growth, we have improving margins in all the venues I mean this is scaling on multiple basis is here and the same venue sales is one of those elements. It will be an important element we will deliver on it.

But focusing on it as if it was the only thing that mattered I think might be.

Placed.

No understood.

As a matter of evaluation, which is why I asked the question but.

Absolutely.

Might you to look at the two year stacks as well as the one quarter data okay.

Follow up on that very quickly.

The U S that you're still the right number in your mind.

Yes, and probably more.

<unk> de risked than it was previously.

Okay.

Thank you.

The next question comes from Alex <unk> of Bank of America. Please go ahead.

Hi, Thanks for taking my questions here.

Maybe just first can you talk to us about the financing environment and unit growth outlook for top calls.

You mentioned, maybe some changes in the way you finance the venues.

Are you thinking about that.

Have you seen any big change in cap rates.

Like maybe you are slowing down unit growth a bit in this environment with eight to nine next year versus the 11. This year just maybe some more color on the financing environment and unit growth outlook for top cost. Thanks.

Sure Alex this is Brian.

First I just wanted to clarify the slowing the unit growth has nothing to do with the financing that is just as chip mentioned, we were doing that one we're just purchased another venue.

And so it's really unrelated to the unit growth the.

Environment is reasonably stable for us the REIT interest remains strong there.

There's competition among the reach for the business to cap rates are holding steady.

The comment about we might choose here or there to self finance the venue is only because once in a while you run into a venue where.

Sure.

For land use restrictions or something else to reach might not be as interested and then we will just do it ourselves but for the most part they are they are interested in our venues and want to partner with us.

And Alex.

Change in the amount of venues that we're building next year, it's just our commitment to being cash flow positive and growing those cash flows in what is obviously a little bit more uncertain environment.

And so.

We've always said when we've talked about capital allocation right that we invest in the business.

But that we're also committed to.

Positive cash flow Delevering and balancing those two and so youre seeing us making an adjustment just like we said we would.

In the short term without getting off the.

Great growth opportunity that business has in the long run.

Perfect that makes a lot of sense and then just last year on this quarter you provided some initial framing for next year any help there or at least qualitatively on sort of puts and takes that we should be considering as we start to put together our models here.

<unk>.

Sure.

The reality is we're we are preparing for potentially softer consumer environment, but thats not a projection of the environment that is just in case, we're not making any specific projections for 2024 at this time other than that we'll be growing EBITDA revenues and cash flow.

And our EPS will be going down because of the.

Items that Brian mentioned.

The EPS going down is just a short term byproduct of the investments we've made along with the timing mismatch between accelerated DNA and resulting cash flows we will provide.

Detailed 2024 guidance at our next earnings call.

But as you heard me say I feel very good about the long term direction of this business the near term direction of the business the midterm direction of the business.

There is clearly one area of the business, we have a little volatility in one of our three growth drivers.

We've got an action plan for that and we have also in detail going through what we think is actually happening there.

With the post COVID-19 surge in events.

And remaining strength on the consumer side with clear path.

Improvements so.

Happy to go further with any other questions on that but I think we are recovering that.

The next question comes from Kate Mcshane of Goldman Sachs. Please go ahead.

Alright, thank you.

Just a couple of questions from us.

This has been asked a couple of times, but.

Looking to have a better value proposition for Wednesdays and Thursdays could you maybe remind us on how the Tuesday offering works what it's done for your sales.

Think about margins.

With regard.

This offering.

Then we just.

Ask you about the factory figure if there's any update there.

<unk>.

Supply.

Thank you.

Sure Kate good questions Wednesday, and Thursday.

Well, let me start half off game play on Tuesday is just what it sounds like we have.

Rate that we charge for gameplay and if you come on Tuesday, you pay half and so that has been something that has been in place since 2019 pre pre merger preview.

Previous team put that in place it has been in place for a long time.

Hi.

Drives increased traffic on a day of the week, where we otherwise would have a lot of extra capacity.

And.

The margins are quite good.

We're looking at some similar types of targeted promotions on Wednesday, and Thursday, we'll be trialing, those we're not going to be rolling those out broadly to start with it it will just be a trial.

We're going to make sure that those do what Tuesday did in centrally use extra capacity that is currently not utilized.

And drive incremental volume and incremental margins and profitability.

We will have to watch that it doesn't cannibalize <unk>.

Weekend traffic because that would be the only way that it could have any negative impact on profitability the way where current lease structured and given the fact that we do very little promotion, but.

That's where we're headed with on that end.

I'm sure we'll be updating you as we go but we've got a pretty clear game plan and pretty good room to operate and we've got margin that are naturally improving over time.

To help.

Absorb this in terms of the factory fire the factory fire, obviously, a tragic event at one of our key vendors in Taiwan.

Launch Tech.

It was a fire.

One of their factories that was located next to the factory that was dedicated to us. So we don't own any of the.

Factories in Taiwan.

They had and do have a dedicated plant for our value golf balls located next to the factory that had this tragic fire.

Fire that building was destroyed and unfortunately it was there was some loss of life and people injured and our thoughts and prayers go out to all of them.

They are not running that plant at this point in time.

And our supply team has just done a wonderful job of finding other capacity moving tooling around and at this point, we do not think it will have a material impact on our business or supply.

It was should not be noticeable.

From a financial or a market perspective, given the strong efforts of our operations team, but it was it was a tragic event.

Thank you I just wanted to follow up on Asia.

Hey, Noah.

Waller part of why we're reducing the guide today, but just any further commentary at all about what you are seeing Q2 to Q3.

Yes, we saw a little softness there Kate but it's almost was given the scale of our business not worth mentioning but we decided to mentioned that just for clarity and transparency.

We're still up on a currency neutral basis year to date through Q3, our market shares are good.

The Korea market was a little down Japan is still decent but had a little bit of slowing.

Almost nothing to see here Kate but we are on the other hand bring it up just keep an eye on it not as massive Florida or our business, but a nice part of our business.

<unk> had a small factor as does FX rates in general on our balance of year forecast. The primary issue in reduction for the balance of year forecast is the change in same venue sales set top golf, which we've talked about.

Thank you.

The next question comes from Casey Alexander of Compass Point Research and trading. Please go ahead.

Hi, Good afternoon, I'll say chip that we've been around forever and Unfortunately for me yeah.

That is a commentary on age for me.

Yes.

I'm going to start easy and then work a little harder with some of these questions first of all.

Very little commentary on big shots why was it available.

How competitive was the process, what's the plan to finance it.

Just a little more color surrounding that since it's kind of unusual.

Unusual transaction.

It is an unusual transaction Casey and four.

Reasons of confidentiality with what is a key strategic partner.

And we're not going to be able to disclose too much about the process of that other than as you would expect I know the people at invited quite well.

And.

In essence this is a synergy that our structure provides right. There is almost nobody else in the world that there is nobody else in the world that I'm aware of.

That could.

Touch all the points on the positive basis that we could and making this deal work together.

So one of the unique things about being.

The structure of our business and having the venue side as well as top tracer.

And our equipment and product businesses in terms of financing it is $29 million and given our scale.

We paid cash and but $29 million is.

Relevant but again.

Our venues when we invest in a venue is often more than $29 million.

And so.

No material impact.

From that basis, and we think it is a highly strategic and also will be accretive deal for both parties we hope.

Secondly.

In relation to the debt refinancing earlier this year the company captured a couple of extra $100 million in order to have a war chest for having to potentially self financed some venues.

<unk>.

What I continue to hear from the company is that the cap rates haven't gone up and there is competition from the rights for the venues.

Is there some sort of a plan to take some of that.

Pitch it back in and pay down some of the debt given the fact that it has seemed less necessary than it might have earlier.

Especially since the rate rise in the market appears to be for all intensive purposes close to its peak.

Yes, Casey, it's just a matter of timing on that so it does give us financial flexibility, we in essence don't need it but we're going to keep it for the short term just in case.

This is one of these periods of time, where you have to plan for.

The best plan for the but if we are wrong and the consumer weakens, we're going to be able to.

Withstand any type of short term risk so it's ed.

Small price to pay for the strength of the position, we have and the financial flexibility going forward. We have no concerns on the rates right now we have every REIT.

That we were trying to line up for next year is lined up.

And yet they will occasionally be a venue that we won't use rights for that's always been the case there is no change in that plan.

Essentially assume that.

Roughly one per year, we will self finance, we self finance El Segundo.

Those things do happen, we need the flexibility for that.

And in today's environment.

Running too close to the edge would be foolish in our opinion, so we have a little bit of extra fleet flexibility going into.

The near future over time, we won't need it.

The next question comes from John David Kernan of TD Cowen.

Cowen Research. Please go ahead.

Yes, Hello, Thanks for taking my question.

Sure Brian.

<unk> eight <unk> on that.

Very thorough deck, you put out earnings presentation deck.

It looks like.

<unk>.

Ramps towards 57 and.

2020.

I think a big chunk of the EPS.

Yes is coming from the non-GAAP interest expense and other income reaching 209.

And $90 million on this on this slide I think it's slide 18.

Let me just talk to.

Why that you.

We pointed out earlier, but maybe talk to why.

Interest expense in that financing is going to rise to that level.

Well, it's part of the additional venue financing. So part of it's just the stage, where we are and Youll see it increased to 2026, and then youll see it ramp from there and so top top top has a lot of DNA and interest expense as it builds new venues the DNA starts to fall off.

And as we generate cash flow and pay down the corporate interest.

Well I mean, it assumes we pay down the debt that goes up we also assume.

125 basis point reduction in rate each year.

Wishes I think conservative then.

Some of the forward rates.

Okay got it and then just back to top golf itself obviously.

Sizable margin expansion year over year, how do we think about top golf.

On EBITDA margin as we get.

Out of Q4 and into next year and into this 2020. Thanks Perry just given that's pretty.

E tail natural floor.

Yes.

We're not going to give a guide for next year I would say over they do believe they have.

Xtra.

<unk>.

Not too far from that right now so hopefully that's fairly credible, yes, hey, John just and we did provide kind of illustrative kind a walk from the four wall margins to total.

Total top golf Abbott, it's on slide 25 in the deck.

And that is when we hit the 35% margin. So you get a good idea of what the EBITDA margin is and then really what the EBITDA margin, including the cash interest related to the venues would be as well so.

So to take a peek at that slide and if you have more questions, let us know.

Thank you.

The next question comes from Eric Wold of B Riley Securities. Please go ahead.

Yes.

Thank you. Thank you hey, good question.

I guess one question two parts on the kind of the top golf on the plan to open eight to nine venue next year that potentially going to ramp back to 11 and 25 any venue has been completely removed from the pipeline or are you merely just shifting everything back.

And if anything has been removed.

What drove those decisions and I have a quick follow up.

We remove venues from the pipeline occasionally because permitting falls through land issues Environmental officer.

As a regular course of business if you would.

We're venues enter and exit your forward pipeline as you get further down the path of the development process.

So, yes from that perspective, but only as a normal course of business otherwise just shifting venues.

And no change in the Tam.

From that perspective in fact I believe the.

Acquisition of invited.

De risks and improves our probability of getting $2 50, if not more.

And then just a quick follow up it would be ideal.

Probably wouldn't be meaningful.

Venues next year that were potentially shifted.

Beyond any any kind of I assume those are committed locations and then you kind of view I guess.

Penalties financial impacts from kind of late opening timing kind of holding onto a mobile longer.

No nothing material and what we're doing with this.

Shift is conserving.

Over $100 million of capital over the next two years.

Which will allow us to.

Derisk our cash flows our cash flows are projected positive. This year. They are projected to increase next year. This further de risks flat and should allow us to move quicker into a more meaningful debt pay down whatever the operating environment is next year.

Some investors have advised that they think would be a prudent move in as we've assessed the situation we.

We believe is a good decision in the current circumstance, but then what we said is approximately 11.

Because what we're really doing is deploying capital right. So the amount of number of venues isn't as important as how much capital we put into play and what the returns on that capital is if you think about it $400 million of gross capital venue build that is going to deliver 20% ROE that's what.

Sure.

Aimed for.

Whether that is 10 venues or 12 venues or one venue opens in December versus January is.

It's noise.

The deployment of capital the pipeline, we feel really good about.

The next question comes from Meghan Alexander of Morgan Stanley. Please go ahead.

Hi, Thanks for taking our question.

I just wanted to bigger picture and maybe more high level could you.

You give us some perspective on how you're thinking about the dynamic between pricing and traffic and the top golf venues.

Both both in the medium and longer term I guess it seems like based on your comments that most of the same venue sales the share probably comes from price and then next year as perhaps a tale of two halves to some degree on the traffic side.

Your comments on evaluating the value proposition and taking a look at.

The days of the week, except for Tuesday.

Like how do you think about what pricing and traffic should contribute at the same venue sales over a longer period of time.

So, making the long and short of it is we expect to be able to drive both price and traffic over the longer period of time.

And so we are seeing some volatility in the short term but.

And at the risk of confusing you our consumer business was traffic was up during the first half of the year.

It was down slightly in Q3 or was down in Q3.

Our spend per visit was up.

So.

The events business is just dealing with the Covid lat. So the traffic is down on a year over year basis on the events business and as we work through that.

But it'll normalize it.

But we believe we'll be able to drive an equal amount of price on traffic over the long run.

You kind of see it in the two year stack I'm sure people are tired of hearing that but that's.

You do and.

We're not we haven't seen.

So clearly there is some price sensitivity, we believe during the weekdays, but not on the weekends.

So we're seeing interesting trends, but what you do about those trends and where it will go forward I think it's fair to clear.

Okay. That's helpful. And then just a follow up on the big shots acquisition.

Three of our locations are franchise I guess do you see an opportunity.

Perhaps the franchise concepts with borrowers and longer term, maybe think about franchising out in the U S.

Well we were pretty.

Im pleased with our current returns that we're generating on the business.

With our owned and operated strategy, but clearly we have experience on the franchising side, we franchise the majority of our international Biz.

Business and we will have some experience with them. So we will stay open minded on that but the.

The primary plan at the moment has continued to be owned and operated in.

The U S for certain U K and.

But we will pick up a couple of venues that are franchise will continue to operate those under the big shots or they will with us as a franchise or.

And we'll look forward to converting them to top tracer.

The other big shots venue that we did acquire we will convert that to a top golf facility.

This concludes our question and answer session I would like to turn the conference back over to chip Brewer for any closing remarks.

Oh, well I just want to thank everybody for.

Tuning in today and participating in what was a longer call than normal.

Obviously, it had a lot to cover and we wanted to present, some new information that we think will be helpful for evaluating our business. So.

Not an avoidable byproduct of needing to go through all of that and provide this.

Information, which we think will be highly helpful to investors. We appreciate your interest and we'll look forward to talking to you again in either follow up calls or.

At our next earnings call in early 2024, thank you.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

Okay.

[music].

Welcome to the top golf Callaway brands third quarter 2023 earnings conference call.

All participants will be in listen only mode.

Did you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.

After todays presentation, there will be an opportunity to ask questions.

Please note this event is being recorded.

I would now like to turn the conference over to Katina That's macaca.

<unk> President of Investor Relations and corporate Communications. Please go ahead.

Thank you Andrea and good afternoon, everyone welcome to top golf Callaway brands third quarter 2023 earnings Conference call I'm Katina met Sadaka as the Companys, 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, Brian Lynch, Our Chief Financial Officer, and Chief legal.

Sir.

Earlier today, the company issued a press release announcing its third quarter 2023 financial results. In addition, there is an updated presentation with supplemental information that we have not shared in the past and may make it easier for you to follow along with this call.

Because we are introducing some new concepts and metrics, we will plan to extend todays call to give additional time for a question and answer session.

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 the call will include forward looking statements that involve risks and uncertainties.

That could cause actual results to differ materially from management's current expectations.

We encourage you to review the Safe Harbor statements contained in the presentation and the press release for a more complete description.

And with that I'd like to turn the call over to chip. Thank you Katina and good afternoon to everyone and thank you for joining us today.

Despite some volatility in top golf same venue sales Q3 was a strong operating quarter.

The team delivered solid results across all segments of our business and expect to deliver mid single digit growth in revenues and EBITDA for the full year.

We are confident we will be free cash flow positive this year.

And have now begun to reduce our financial leverage.

As we look across our business. We are encouraged by the fact that our golf consumer remains strong.

As does the Callaway equipment brand and product pipeline, our active lifestyle segment continues to deliver growth in top line and operating margin.

Sure.

Unfortunately.

Lower near term sales in our venues as well as current foreign exchange rates resulted in lower forward projections at this time.

As you would expect we don't take these changes lately and we do not intend to make a habit of them.

Excluding 2020 this will be the first full year earnings guide that we have missed in my 11 plus years of running this business.

The teams quickly recognize the changing conditions and are now taking swift and decisive action to reduce cost capture further synergies and drive improved profitability.

Given our strong financial resources and businesses that are well positioned for long term success, we remain strongly confident in our growth algorithm and the direction of our business.

Let me now walk you through our business segment performance in Q3.

I'll begin with top golf.

Starting with the three key performance drivers for our venue business venue development, saying that <unk> sales growth in venue margin expansion.

With seven venues opened year to date top golf remains on track to open 11, new venues in 2023.

As usual the new venues are performing well.

While we're on this subject I wanted to provide an update on our acquisition of big shots from invited the largest private golf and country club owner and operator in North America, and a key strategic partner of top golf Callaway brands.

As part of this strategic transaction, we acquired the largest active competitor to top golf, including one new owned and operated venue.

Two franchisee relationships covering three venues, which we expect to convert to top tracer accounts in the near future.

And enhance and Derisk future pipeline as we will now assume big shots pipeline, some of which overlap with ours.

All for approximately the same price of building a single top golf venue.

With the venue acquired through this transaction and the potential to add one additional venue in the first half of next year.

We plan to build only eight to nine additional new venues in 2024.

This change along with the strategic assessment, and resulting tightening of our other capital expenditure plans.

Will save us approximately $100 million in planned capital over the next two years.

This will improve our already positive cash flow and accelerate our expected debt paydown schedule.

It will therefore, derisk our business over the near to medium term something we believe some investors will appreciate.

Consistent with previous communication, we maintained high confidence in the venue returns, which remain at an 18% to 22% return on gross investment and a 50% to 60% cash on cash return based on targeted year five results.

And thus we expect to resume building approximately 11 venues per year again in 2025.

Our projections support this new capital allocation plan is the best way to drive shareholder value.

And we believe we have more than enough capital available to support this growth plan.

However, if business conditions necessitate it we can pull back on these investments and all stakeholders should be confident we would do so.

Moving the same venue sales.

These were down 3% in Q3 due to weaker than expected demand along with extreme heat that impacted our venues located in southern markets, including Texas during a portion of the quarter.

Our consumer or one or two bay business, which as a reminder represents approximately 80% of our total business on an annual basis.

Was flat versus last year and remains up nicely versus 2019 levels.

Our corporate events business declined approximately 17% year over year in Q3.

As we continue to lap the post COVID-19 surge in demand we saw last year.

That said the corporate events business appears to have stabilized during the quarter and.

And the two year stack using 2022, and 2019 was still up 4%.

This two year stack chart is included in our Investor presentation on page four I believe it provides a helpful way to look at the performance year to date.

As it shows the lapse, we are anniversarying and that the business remains up nicely versus pre COVID-19 on a two year stack basis.

Looking forward on the same venue sales.

After improving in September October results softened overall.

Interestingly, we see a consistent trend of sales remaining strong on the weekends as well as on Tuesdays, where we offer half of game play.

The lower same venue sales, we are seeing is largely confined to our events business as well as Monday, Wednesday, and Thursday, where we are not providing either value or a special occasion.

As Youll hear in a moment this difference by day of the week is instructive for action plan.

And the fact that the events business is stabilizing as important for forward projections.

Before I go there, let me unpack the Q4 forecast.

For Q4, we're now forecasting corporate event demand down low teens year over year, which is consistent with actual current booking trends.

And would result in a two year stack of approximately flat for this portion of our business.

This decline is less than the corporate was down in Q2 and Q3 as we continue to see that business stabilizing how.

However, corporate is a higher percent of the sales mix. This quarter. So it is more impactful to the total.

We are forecasting the consumer portion of our one to two bay business down low single digits versus last year for Q4, thus, reflecting the results we saw in October.

With this forecast our two year stack for consumer would be up high single digits versus 2019, as the consumer portion of our business, although the slowing some remains healthy versus historical levels.

As a result, we're now guiding to down mid to high single digits for Q4 and slightly down for the full year, but please note that both of these are up nicely on a stacked basis.

Moving to what we're going to do about it.

Given the day of the week trends and also believing that in the current environment consumers are being offered and are probably looking for greater value to attempt them out during the week.

We are immediately doubling down on communicating our Tuesday value offering.

And in test markets, we will be trialing additional value offerings aimed specifically at Wednesdays and Thursdays.

We're also going to ramp up our cross brand synergies by promoting top golf offers to both Callaway and Travis Matthew loyalists.

In this clearly choppy environment, one of our relative strength is.

With expanding venue margins and minimal current promotional activity, we have room to implement new promotions and still deliver strong four wall returns at our venues.

Furthermore, our recent digital efforts enabled us to effectively target specific segments and days of the week.

Our base inventory management system, which is now in all of our venues except for Las Vegas.

This will effectively create more available inventory during peak hours provide more value to the consumer and more profit opportunity.

And as more of our business is sold through reservations. We are working on further product innovation to offer add ons and up sell things like food and beverage packages.

Better Bay, our Florida location potentially some services like introductory lessons and maybe even upgraded equipment.

Moving onto our third performance driver venue margin expansion.

The team just did an outstanding job here during Q3 the.

200 basis points above last year.

This should provide confidence both in our ability to deliver margins in tough environments.

And in our ability to hit our 35% full year venue EBITDA margin target by 2025, if not sooner.

Shifting gears to top tracer golf's number one range technology is on pace to open just over 7000, new base this year consistent with expectations.

Get feedback and demand remain positive.

Moving to our golf equipment segment, we're pleased with our results, which are largely in line with our expectations.

We're also pleased to report that the U S golf consumer remains strong and engaged as.

As evidence of this U S rounds played or up approximately 4% year to date through September.

And it maintains its brand leadership position in technology and innovation.

Our paradigm driver has also had the most wins across worldwide tours.

And we continue to grow our position in ball with market share sustaining approximately 20% sales up 7% year to date and an exciting new premium ball launch coming early next year.

That said in reaction to the change in market conditions, we are lowering our sales and margin estimates for Q4 for this region.

At this point, we do not see this as a significant concern for 2024, just something that bears mentioning and watching.

In the U S field inventories in golf equipment will remain in line with expectations as does the promotional environment overall, a healthy market.

Just last week, we launched a new exciting cutter Odyssey AI, one featuring a revolutionary new insert that our testing shows delivers up to 21% better distance control on putting.

<unk> already made its way into the bags that players like John Sam Burns and Brian Lynch.

We're excited about this new product and invite you to visit our website to see it for yourself.

Lastly, as you think about our golf equipment business going forward I would like to remind everyone of two important points.

First the golf equipment business has not historically been sensitive to mild recessions.

And secondly, our brand and management team have a nice track record of performance that meets or beats. The overall market something we expect to do again this year.

You can see evidence of both these points on slide seven and eight in the investor deck.

Moving to active lifestyle Travis Matthew continued to grow its top line by double digits, driven by continued brand momentum and new store openings. The growth here is bolstered by progress, we're making on our new women's line, including a small but successful introduction of the line at nordstrom's.

Jack Wilson also posted encouraging results in the quarter was solid growth. Despite a choppy macro environment in Europe and the brand remains on track for growth in both revenue and profits in 2023.

Now looking forward, let me briefly unpack the change in guidance.

We're revising the mid points of our 2023 revenue and EBITDA guidance to $4 to $5 billion and 580.

Million respectively.

The revision is primarily due to the lower same venue sales at top golf.

The slowing business conditions in Asia, and the foreign exchange rate movements since last quarter had contributing but smaller impacts.

As mentioned, we continue to expect to be cash flow positive. This year, both at the corporate level.

And the top golf.

Across Opex and gross margin, we expect to realize savings of approximately $45 million per year.

And as previously mentioned, we are reducing our planned capex spend by approximately $100 million over the next two years.

These actions are aimed at derisking our forward forecast.

Looking further forward, we're moving our target of at least $800 million in EBITDA from 2025 to 2026.

The primary driver of this move as foreign exchange rates as there is now a $165 million revenue headwind and close to $100 million EBITDA headwind.

This is the rates we used in early 2022.

And this along with the economic trends. We are currently experiencing make this move appropriate at this time.

To help better forecast our growth and cash flow. We're also introducing two concepts that were suggested to us by investors.

The first of these is EBITDA less cash venue financing interest.

This calculation avoids the complication of us, having both operating or finance leases by reducing EBITDA by the cost of both.

It essentially captures all cash payments that resemble rent.

Which is a reasonable way to look at the business both from an EBITDA and a leverage perspective.

The second is embedded cash flow, which is free cash flow before growth capex or what our cash flow would be if we didn't continue to add new venues of retail stores.

Embedded cash flow is what's available to either reinvest in future growth or return to shareholders.

In conclusion and looking ahead.

Top golf Callaway brands had strong underlying fundamentals robust financial resources and premium brands that have clear defensive moats, both individually and collectively.

We operate primarily in the arena of modern golf.

An attractive and growing market that benefits from positive long term trends and structural growth.

We're now making the important transition to the cash generation period of our economic journey.

And although we are experiencing some short term volatility. We're also taking steps to make sure. We both stay cash flow positive and deliver strong growth going forward.

As I look forward I remain confident in our outlook.

And that our structure provides us both synergies and a long term competitive advantage.

I'll now turn the call over to Brian to provide detail on the financial side of our business.

Thank you chip and good afternoon, everyone.

Overall, we are pleased with our third quarter results, including our ability to deliver higher than expected EBITDA on softer than expected revenue.

This is in part attributable to top golfs continued improvements in venue profitability as.

As well as its management of labor costs.

In preparation for potentially softer market conditions, we have taken action to reduce planned capital and operating expenditures, while maintaining our long term growth plans.

Our financial position remains strong.

Our available liquidity, which is comprised of cash and borrowing capacity under our credit facilities.

Has increased this year from $415 million at December 31, 2000, $22 million to $734 million of September 32023.

This is in large part due to the refinancing and additional borrowings we completed earlier this year.

We remain focused on generating cash flow and managing leverage and have the flexibility to further reduce costs and cash outlays if necessary.

Now moving to Q3 results.

In the third quarter revenue increased five 3% year over year to $1.04 billion.

Which is about $9 million or a little less than 1% below the low end of our guidance range.

Revenue increase versus Q3, 2022 was driven primarily by growth in top golf as well as Travis Matthew and Jack Wolfcamp.

The majority of the shortfall versus our Q3 guidance is attributable to an approximate 3% decrease in same venue sales at top golf.

Below our guidance of 1% to 3% growth.

Q3, non-GAAP operating income increased five 1% to $85 million consistent.

Consistent with our revenue growth.

Q3, non-GAAP net income decreased $6 $4 million year over year Pri.

Primarily due to a $17 million increase in interest expense relate.

Related to higher interest rates additional term loan debt and increased venue financing interest.

Adjusted EBITDA of $163 million increased 13% compared to last year.

And exceeded the high end of our guidance range by approximately $9 million.

Due primarily to continued venue margin expansion and reduction in planned operating expenses.

Turning to segment performance.

In Q3 top golf revenue increased 8% to $448 million.

Driven by the addition of nine new venues since Q3 2022.

And partially offset by a decline of approximately 3% and same venue sales during the quarter.

<unk> segment operating income increased 65% year over year to $39 million.

And adjusted EBITDA increased 42% to $91 million.

Due to the increased revenue and continued venue margin expansion.

The recently announced <unk> acquisition is expected to be slightly accretive to top golf in 2024 and growing thereafter.

This was both a strategic transaction and attractive from a financial point of view, but small on a relative scale basis.

Our golf equipment segment results exceeded our revenue and operating income forecast.

Golf equipment revenue declined 1% to $293 million.

I'm really due to an expected shift in equipment launch timing from Q3 to Q4, this year and softness in Asia as well as a 5% decline in golf ball sales.

Due to the retail channel inventory catch up in golf balls in Q3 2022.

Golf equipment operating income was $35 million.

A decrease of $14 million compared to the prior year.

This is due to less launch product in Q3, this year versus last year.

A return to normal promotional levels.

And lower production volumes this year versus 2022, and thus less fixed cost absorption.

The active lifestyle segment grew 8% to $300 million.

Driven by continued strong double digit growth in Travis Matthew and solid growth in <unk>.

Operating income increased approximately 42% year over year to $40 million.

Driven by a higher mix of margin accretive director consumer sales as well as tailwind from lower freight costs.

Moving to our balance sheet.

As mentioned earlier as of September 32023, we have available liquidity of $734 million.

Based on our modeling we believe this liquidity position is more than sufficient to execute our business plan, even if the market soften further.

At quarter end, we had total net debt of $2 1 billion.

Which excludes convertible debt of approximately $258 million.

Compared to $1 5 billion at the end of Q3 2022.

This increase relates primarily to incremental new venue financing and the additional $300 million of term loan debt.

<unk> the venue financing REIT debt net debt is $1.06 billion.

At the end of Q3 2023 versus <unk> $74 billion at the end of Q3 2022.

Our net debt leverage which excludes the convertible debt was three eight times at September 32023, compared to four one times at June 32023.

The quarter over quarter improvement was driven by the increase in EBITDA and improved cash position.

Internally, we find it helpful to look at our net leverage by excluding the venue financing REIT debt.

This debt is essentially an interest only loan with no principal repayment required.

The interest payments are akin to ramp, but accounting rules classify them as interest.

When the venue financing reap that is excluded from debt and the corresponding repayment burden ebitdas rent payments.

Our net debt leverage ratio is two one times.

We continue to review reach is a capital efficient way to finance our venues.

Switching gears.

Here's to working capital consolidated net accounts receivable was $305 million at the end of Q3 2023 compared to $270 million at the end of Q3 2022.

Non top golf days sales outstanding increased slightly from 52 to 54 days.

Our inventory balance decreased $222 million.

From $959 million, a year end 2000 $22 million to $737 million in Q3 of this year.

This is in part due to seasonality, but also the teams concerted efforts to reduce inventory following the post covered surge last year.

Inventory is expected to increase in Q4 due to normal seasonality as we prepare for new golf equipment product launches in 2024.

But it will still be significantly lower than at the end of 2022.

We expect inventory to decrease further in 2024 is our apparel business is normalized their inventory.

We are pleased with the overall reduction in inventory and the quality of our inventory remains good.

Capital expenditures for the first nine months were $389 million and we received reimbursements of 108 $88 million for net capital expenditures of $201 million.

Of which a $152 million is related to top golf.

For the full year, we expect total capex of approximately $240 million net of expected reimbursements, including $175 million for topped off a.

A $30 million reduction from our previous 2023 guidance.

We've included on Slide 16, our presentation today and estimated detailed breakout of the Capex for 2023, and Capex assumptions going forward.

Now moving to our outlook.

As I mentioned earlier, given the trends, we're seeing in top golf in Asia, and with foreign currency exchange rates.

We are lowering our full year 2023 revenue guidance range to $4, two 4% to $4 6 billion.

Which at the midpoint would still represent 6% year over year revenue growth versus 2022.

We are lowering our current adjusted EBITDA guidance range to $575 to $585 million.

Which at the midpoint represents 4% year over year growth.

Most of the reduction from the prior forecast is related to copco.

At the top golf segment level, we are lowering our full year revenue guide to approximately 175 billion for the year or 13% growth versus 2022.

Same venue sales is now expected to be down slightly versus prior year.

<unk> EBIT guidance is also being lower a range of $280 million to $290 million.

Which at midpoint represents 21% growth versus 2022.

This reduction is attributable to the current trend in same venue.

With regard to Q4, we still expect to grow revenue and adjusted EBITDA in the fourth quarter.

We are estimating revenue of 847% to $872 million.

Which at the midpoint represents 1% growth versus the prior year.

We're top golf, we are estimating Q4 revenue to be approximately $423 million.

Which would represent 4% growth versus 2022.

The top golf increase is expected to be driven by new venues, partially offset by a mid to high single digit decline in same venue sales compared to 2022.

We are estimating consolidated Q4, adjusted EBITDA in the range of $48 million to $58 million, which at the midpoint of guidance would represent 45% year over year growth.

The top golf, we are estimating Q4, adjusted EBITDA of approximately <unk> $49 million to $59 million compared to $43 million last year, a 25% increase.

An important takeaway from our Q3 performance in Q4 forecast as it were.

We're able to grow adjusted EBITDA, even in challenging conditions.

We have pushed out at our Investor day goal of at least 800 plus million dollars and adjusted EBITDA by one year to 2026.

Foreign currency exchange rates move dramatically since that time the change in rates had over a $165 million negative impact on revenue and close to $100 million impact on EBITDA. Since then.

While our over performance had been covering the foreign exchange negative impact to foreign exchange impact combined with softer market conditions.

Causing us to push that go out a year.

Chip mentioned, we are also providing today additional information about cash flow, including a new term we call embedded cash flow.

Embedded cash flow is free cash flow less growth capex.

For these purposes growth Capex is limited to new venues and new retail stores.

We think it is an important because it reflects the cash flow generation power of the current business.

Investors can then separately evaluate whether our investment of that cash flow and growth capex as a good investment.

We believe this is a better way to evaluate the company as to date a significant investment in growth Capex may have overshadowed the cash generation power of the current business.

It also has the benefit of eliminating some of the noise related to the timing of <unk> reimbursements that can affect free cash flow on a quarterly basis.

On slide 17, we provide a detailed breakdown of estimated cash flow for 2023 and assumptions for future cash flows.

The short answer however.

We would expect to have approximately $150 million and embedded cash flow this year and growing to approximately $325 million in 2026, when we expect to have over $800 million and adjusted EBITDA.

Thereafter, we would expect the embedded free cash flows to grow impressively at least 25% per year.

Furthermore, as top costs EBITDA less cash venue financing interest starts to meaningfully outpace its capital requirements in 2026.

In 2024, however, given the current phase of the top golf growth cycle.

<unk> is forecast to decline because top golfs growth in DNA and venue financing interest will be $85 million headwind in 2024.

In addition at current rates, we expect to have a $30 million headwind from foreign currency translation and hedge gains in 2023 that are not assumed to repeat in 2024.

EPS should grow in 2025 off of the 2024 base and then ramp from there.

We're providing greater detail on all of this in our investor presentation on slide 17% to 19.

For those interested we are also provided in the appendix to the presentation and illustrative walk a venue for wall EBITDAR margin through total top golf segment level adjusted EBITDA.

I know we've covered a lot today and thank you for your patience.

As you all well know companies go through varying economic cycles over time.

The favorable conditions are certainly more enjoyable, but the strong companies that remain flexible can prosper in challenging conditions as well.

I believe we are in the process of proving that we are.

We're demonstrating revenue and EBITDA growth during softening conditions.

We are taking action to manage costs and we have sufficient liquidity not only to endure softer market conditions, but also to continue our growth plan.

While we continue to monitor market conditions and adjust as necessary our fundamental growth algorithm remains intact.

We are also at an important inflection point in our top golf journey.

The first phase after we merged was an investment phase that required us to provide funding to accelerate growth through additional venue development.

This phase was very successful we significantly increased the number of new venues developed and at the same time increase the profitability of the venues, resulting in the rapid EBITDA growth.

We are now in phase II and expect to be in it through 2024.

During this phase top golfs cash flows increase earnings per share stabilize and leverage begins to gradually decrease.

Thereafter in phase III top golfs cash flows accelerate as is cash flow begins to meaningfully exceed its capital requirements, allowing the company to pay down debt and increase in earnings per share as well.

To conclude by way of a brief summary.

First we are demonstrating our ability to grow EBITDA under current conditions.

Second we have a solid financial position and sufficient liquidity to execute our growth plans.

And as Chip mentioned, we are taking action to reduce costs and reduce costs in preparation for potentially softer market conditions, including approximately $45 million in cost savings across Cogs, and opex and close to a $100 million reduction in planned capital expenditures.

And third our long term growth algorithm remains intact, we are more than one year ahead of plan at the time of the merger.

As a result, the total company will be free cash flow positive this year and top golf is expected to be free cash flow positive this year as well assuming receipt of all the reimbursement centers expected by December 31.

We have made great progress and have a clear path to further growth.

With that said operator, we can now open the call for questions.

We will now begin the question and answer session.

To ask a question.

And then one on your Touchtone phone.

You are using a speakerphone please pick up your handset before pressing the keys.

Withdraw your question. Please press Star then two.

In the interest of time, we ask that you. Please limit yourself to one question and one follow up.

At this time, we will pause momentarily to assemble our roster.

Okay.

And our first question comes from Matthew Boss of Jpmorgan. Please go ahead.

Great. Thanks.

So maybe just start off chip.

They're a way to break down the 500 basis point same store sales Miss versus planet top golf this quarter, maybe how much was macro how much was execution and then if we look at current business. What is the trend line that you've seen in October maybe relative to the negative mid to high single digit comp guide.

For the fourth quarter.

Sure Matt.

So if you look at Q3.

We provide year.

Two year stacks on page four of the investor deck and.

We saw a couple of different things in Q3 relative to our expectations we saw.

A little bit softer business, both on the corporate side and on the consumer side than what we expected.

And we also saw some.

Extreme heat throughout the southern markets, where the same venue sales in the southern markets were significantly lower than the same venue sales in the northern market.

And we skew towards southern markets.

For your information during a big portion of the quarter, primarily in August with a little bit of shoulder around that.

And that's in essence, what we saw during Q3.

September picked up a little bit versus August but.

The general trends are covered there.

Then.

October after picking up a little bit in September we saw it dip down a little further and what we're projecting in for the quarter is consistent both with what we actually saw in October.

And.

What the corporate bookings are showing us quarter to date, so we're using.

The actual results to do that forecast.

<unk>.

We are encouraged by the fact that we see the corporate side of the business stabilizing.

We are encouraged by the fact that the consumer side of our business remains very strong on a two year stack basis.

And we're also encouraged by the fact that the business remains strong on weekends and on Tuesday. So the nature of the issue is really confined to a really post COVID-19 surge that occurred in corporate events and that is.

Stabilizing and we're working our way through that.

Rationalization and then.

A little bit of slowness that we're seeing on the consumer side, that's during the really Monday Wednesday, and Thursday, So we'll be targeting that specifically.

Sure.

The second one first.

The the call.

The cost savings are really it's the input in Cogs as a part of it and then just a reduction in normal operating expenses.

That included some personnel reductions and and include other SG&A costs consulting.

And so thats going into next year.

Then on the what was the first question.

The drivers of EBITDA margin expansion in the fourth quarter, despite the softer revenue outlook.

Yes, so a lot of it will still be.

<unk> outperforming.

With their venue margin Thats continue they continue to make great progress there, which is what allowed us to.

Exceed EBITDA despite softer revenues.

And.

Primarily that's the main part.

Yes.

Great Best of luck.

Yes.

The next question comes from Randy <unk> of Jefferies. Please go ahead.

Hey, good afternoon guys.

When I look at the guidance change I think the EBITDA dollars at the midpoint are down 8% the stock's down 16% in the after hours and then when I look at the valuation implied even before the quarter print.

The stock multiple.

Seems very dislocated from our core PR that just as in the golf equipment space. So I guess when I when I look at that we think about how the market is voting.

Do you think about or how do you think about potential strategic alternatives or do you consider that at all.

How should we be thinking about that given the where we are with destock and how it kind of looks valuation wise versus peers.

And again when you have a core business in Callaway producing.

Solid numbers and good cash flow.

And then pop golf is kind of weighing the business down with it I guess lack of cash flow. Even though you think you said, it's going to turn positive. This year. So how is how do you guys think about that how should we be thinking about that.

In a nutshell.

Hey, Randy this is chip.

Obviously, a fair question and something that we give considerable thought to.

As you would expect we're always focus first and foremost on our primary day job of running the business executing the business strategy.

Controlling what we control to increase long term economic value of the business, but at.

At the same time.

We recognize that as our fiduciary responsibility and just good business practice to regularly evaluate strategic options.

That could enhance shareholder value.

That includes the changes in portfolio, whether that be sales or spin outs et cetera.

We regularly do that we've done that we will continue to do it and we.

We think that is right business practice, we do that with both the engagement of our board of directors and outside advisers.

We also fundamentally believe our current structure provides us a competitive advantage and over the long term our financial performance will be showing that thus any strategic option would have to be viewed as superior to it but we absolutely.

Do as a regular course of business engage in those strategic assessments using both board and outside advisors.

Got it and then my last question would be maybe give us some perspective on.

You've been in this business and this industry forever you've been on the board.

Top golf for a number of years as well.

Can you give us some perspective on what youre thinking about as it relates to the the golf equipment industry and it kind of outlook over the next couple of years based on your history in the industry on how that looks and then maybe contrast that.

See how it's similar or different with top golf based on your extensive tenure.

At the board level with that business for a number of years now before merging with it. So just give us a flavor would be very helpful. As we think about your ramp.

Happy to and I am going to overlook the you've been in the industry forever comment because it sounded a little bit like something to do with my age but.

The golf equipment business in golf in general has never been healthier.

I can't be much more.

Optimistic on the long term fundamentals of golf.

You can see it in every metric you can see energy and momentum around the game Youll see structural growth you see.

More money being dedicated and invested in and around the game than you've ever seen you may see more diversity.

You never had off course golf.

Significant way and now only top golf not just all off course golf only top golf will be larger than on course golf in the U S.

And so just fundamentally in a strong position our brands in a good position.

Obviously, there is some concern about the consumer out there we do not see any sign of consumer weakness in the golf equipment business and our brand strength and momentum feels very good to me so.

Very strong on that side.

And on top golf side, it's a lot of the same we obviously have some short term same venue sales volatility that we're working through.

As I have stated a lot of that is a post COVID-19.

Surge that was in the corporate and event side of our business that we're working through now if you took that out.

This would just be noise, and we would be nothing but strength and it shows on the same venue sales two year stack data and we clearly have the ability to.

We think address that and maintain our margins on top of that we're opening venue successfully we are increasing the margins of the business even in a soft environment.

We beat our EBITDA numbers, despite the same venue sales Miss.

Pretty impressive.

So I feel very bullish about both of these businesses over the long term and.

We're going to do our best to make.

And make sure that the market sees those.

Clearly as we as we deliver them.

Thanks, so much.

The next question comes from Daniel <unk> of Stephens. Please go ahead.

Yes, Hey, good evening everybody.

Maybe to continue on with top golf side, just as we think about what you just add the ability to deliver EBITDA on a tougher tougher top line.

Can you just provide more color and breakdown, what the fixed versus variable cost side of the venue side is here, especially as we think about how long these negative comp trend could last.

Trying to get a better sense for what the cost structure looks like they're at Topco and I didn't catch your answer to earlier question does the <unk> EBITDA guide include some of those $45 million of cost synergies that you quantified.

I believe.

The cost synergies will be primarily next year.

So but.

And in terms of the fixed versus variable, Brian or Patrick do you want to try to grab that one on the.

Top golf side. It's obviously, we've shown we can increase margins Daniel and.

We drove 200 basis points improved year over year margin and near in mid Thirty's EBITDA margins.

Out of.

Top golf and the definition of fixed versus variable is very dependent on time. So.

It can all be.

Other than the.

<unk> debt.

There's very little cash side that isn't variable over a longer period of time, but.

We believe that we're going to be able to continue to drive.

We're confident Daniel we're going to continue to drive profits out of these and we're showing that I don't know, we candidly what else we could do.

On that front labor expenses, a significant portion of their venue expense and a lot of that most of that is flexible righteously hourly workers. So they can adjust up and down as the.

The venue sale.

Revenue goes up and down they can adjust and they do a great job and that was just one of the reasons, we've been able to grow the same venue margins. So they're pretty good at that you saw that even during COVID-19 and different places like that they can reduce it significantly if they have to and then and that's really where they're also making efficiency progress right. There just utilizing that labor much more efficiently right. So.

If you look at that ability right that that is driving.

That those Abbott is to increase even though you have.

Negative same venue sales comp.

And then the Pi system and the last thing Daniel as we work around the room here.

Is obviously, helping us drive the efficiency here, having that in all venues but.

Vegas.

That helps on multiple sides of the business, but will unlock continued efficiency gains you can see it in the data.

Through Q3 as it starts to percolate through the system.

Understood and then maybe a follow up on the top golf consumer comp. So that did obviously decelerate and you talked about kind of what youre seeing is that manifesting just in fewer visits and a smaller ticket per visit like we're seeing a trade down with less food attachment or less spending when people come and then given that decelerating trend.

In recent months I guess can you talk about the decision to guide based on October I again, I know weather comps get easier but.

The consumer keeps softening I guess.

How do you think about the risk to that consumer comp guidance for the fourth quarter that you guys have given thanks.

Sure.

First question, what we saw in Q3 was actually a slight increase in spend per visit and so most of the Miss was traffic.

The traffic is spread over corporate and consumer but traffic not spend per visit.

As mentioned on the weekends and on those Tuesdays are comps were up.

So.

This is.

Very isolated or targeted but we.

We are aware of a softening trend.

And what was the second part of the question again.

Just the risks as we see headline traffic slowing and it sounds like that's not incorporated in the guide kind of how you think about the risk to the guide if the consumer goods.

We did not forecast lower than what we're seeing but we're not seeing lower than what we forecast.

Alright understood I appreciate the color and best of luck.

Thank you.

The next question comes from Joe Altra Belo of Raymond James. Please go ahead.

Thanks, Hey, guys good afternoon.

Sticking with with top golf not surprisingly just curious what do you think.

A good steady state run rate for same thing he sales is and I ask this because.

We go back when you guys acquired this business.

Comps.

We're fairly anemic.

Pretty low yes, we'll take it.

Sure.

And this is the biggest pushback that I get at least from from investors on the stock is.

What do we what kind of value that we ascribe to this business.

It doesn't comp so how are we to understand what you think a normal steady state run rate is.

The same thing in sales and <unk>.

Why wouldnt be materially higher than what we saw.

Pre COVID-19.

Well, we thank Joe that we can deliver low single digits positive comps over time.

There is going to be some volatility in those on a quarter to quarter basis, but.

We believe we can deliver low single digit same venue sales comps.

I believe there's momentum behind the game in the concept and we believe we will have scale advantages in terms of our marketing muscle. This is a concept that is not weakening.

But strengthening the.

The national presence that we will have and scale advantages and all of the other positive tailwind around.

Golf, including top golf.

And off course golf.

Are great indicators of that and.

The digital implementation that we're doing now.

Unlock that as well back in the day, they were only 5% digital right. That's not how the consumer wants to engage we're scaling that theres just a lot of different areas that we are confident we will be able to pull.

The levers on and drive further improvement in the business, but thats not the only growth driver here.

Same venue sales is important and we will deliver it.

But this is a multi unit venue growth, we have improving margins in all the venues.

This is scaling on multiple basis is here and the same venue sales is one of those elements.

He will be an important element, we will deliver on it.

But focusing on it as if it was the only thing that mattered I think might be missed.

Misplaced.

No understood.

Does it matter to valuation, which is why I asked the question but.

Absolutely.

Might you to look at the two year stacks as well as the one quarter data okay.

A follow up on that very quickly.

The U S that you're still the right number in your mind.

Yes, and probably more.

<unk> de risked than it was previously.

Okay.

Thank you.

The next question comes from Alex <unk> of Bank of America. Please go ahead.

Hi, Thanks for taking my questions here.

Maybe just first can you talk to us about the financing environment and do unit growth outlook for top calls.

You mentioned, maybe some changes in the way you finance the venues.

Are you thinking about that.

Have you seen any big change in cap rates.

Sure Alex this is Brian.

First I just wanted to clarify the slowing the unit growth has nothing to do with the financing that is just as chip mentioned, we were doing that one we're just purchased another venue.

And so it's really unrelated to the unit growth.

The environment is reasonably stable for us the REIT interest remains strong there.

There's competition among the reach for the business the cap rates are holding steady.

The comment about we might choose here or there to self finance the venue is only because once in a while you run into a venue where.

For land use restrictions or something else to reach might not be as interested and then we would just do it ourselves but for the most part there they are interested in our venues and want to partner with us.

And Alex.

And so.

We've always said when we've talked about capital allocation right that we invest in the business.

But that we're also committed to.

Positive cash flow Delevering and balancing those two and so youre seeing us making an adjustment just like we said we would.

In the short term without getting off the.

Great growth opportunity for the business has in the long run.

<unk>.

Sure.

And our EPS will be going down because of that.

Items that Brian mentioned.

The EPS going down is just a short term byproduct of the investments we've made along with the timing mismatch between accelerated DNA and resulting cash flows we will provide.

Our detailed 2024 guidance at our next earnings call.

But as you heard me say I feel very good about the long term direction of this business the near term direction of the business the midterm direction of the business.

There is clearly one area of the business, we have a little volatility in one of our three growth drivers.

We've got an action plan for that and we have also in detail going through what we think is actually happening there.

With the post COVID-19 surge in events.

And remaining strength on the consumer side with clear path.

Improvements so.

Happy to go further with any other questions on that but I think we are recovering that.

The next question comes from Kate Mcshane of Goldman Sachs. Please go ahead.

Alright, thank you.

Just a couple of questions from us this.

This has been asked about a couple of times, but.

Looking to have a better value proposition for Wednesdays and Thursdays could you maybe remind us on how the Tuesday offering work what it's done for your sales and how you think about margins.

With regards to increasing this offering.

And then we just to recall.

About the factory side or if there's any update there.

John.

Supply.

Thank you.

Sure Kate good questions Wednesday, and Thursday.

Well, let me start half off game play on Tuesday is just what it sounds like we have.

Rate that we charge for gameplay.

If you come on Tuesday, you pay half and so that has been something that has been in place since 2019 pre pre merger.

Previous team put that in place it has been in place for a long time.

Hi.

Drives increased traffic on a day of the week, where we otherwise would have a lot of extra capacity.

And.

The margins are quite good.

We're looking at some similar types of targeted promotions on Wednesday, and Thursday, we'll be trialing, those we're not going to be rolling those out broadly to start with it'll just be a trial.

If we're going to make sure that those do what Tuesday did in centrally use extra capacity that is currently not utilized.

And drive incremental volume and incremental margins and profitability.

We will have to watch that it doesn't cannibalize.

Weekend traffic because that would be the only way that it could have any negative impact on profitability. The way. We're currently really structured and given the fact that we do very little promotion, but.

That's where we're headed with on that end.

I'm sure we'll be updating you as we go but we've got a pretty clear game plan and pretty good room to operate and we've got.

<unk> got margins that are naturally improving over time.

To help.

Absorb this in terms of the factory fire the factory fire, obviously, a tragic event at one of our key vendors in Taiwan called.

Called launch Tac.

It was a fire.

Hey.

One of their factories. It was located next to the factory that was dedicated to us. So we don't own any of the.

Factories in Taiwan.

But they had and do have a dedicated plant for our value golf balls located next to the factory that had this tragic fire the fire that building was destroyed and unfortunately.

There was some loss of life and people injured and our thoughts and prayers go out to all of them.

They are not running that plant at this point in time.

And our supply team has just done a wonderful job of finding other capacity moving tooling around and at this point, we do not think it will have a material impact on our business or supply.

It was should not be noticeable.

From a financial or a market perspective, given the strong efforts of our operations team, but it was it was a tragic event.

Thank you and then I just wanted to follow up on Asia.

I know that's a smaller part of why you are reducing the guide today, but just any further commentary at all about what you are seeing Q2 to Q3.

Yes, we saw a little softness there Kate but it's almost was given the scale of our business not worth mentioning but we decided to mention it just for clarity and transparency.

We're still up on a currency neutral basis year to date through Q3, our market shares are good.

The Korea market was a little down Japan is still decent but had a little bit of slowing.

Almost nothing to see here, Cape, but where on the other hand bring it up just.

Keep an eye on it not as massive part of our business, but a nice part of our business.

Thank you.

The next question comes from Casey Alexander of Compass Point Research and trading. Please go ahead.

Hi, Good afternoon, I'll say chip that we've been around forever and Unfortunately for me.

That is a commentary on age for me.

Yes.

I'm going to start easy and then work a little harder with some of these questions first of all.

Very little commentary on big shots why was it available.

How competitive was the process, what's the plan to finance it.

Just a little more color surrounding that since it's kind of unusual.

Unusual transaction.

It is an unusual transaction Casey and four.

Reasons of confidentiality with what is a key strategic partner.

And we're not going to be able to disclose too much about the process of that other than as you would expect I know the people at invited quite well.

And.

In essence this is a synergy that our structure provides right. There is almost nobody else in the world that there is nobody else in the world that I'm aware of.

That could.

Touch all the points on the positive basis that we could and making this deal work together.

So one of the unique things about being.

The structure of our business and having the venue side as well as top tracer.

And our equipment and product businesses in terms of financing it is $29 million and given our scale.

We paid cash and but $29 million is.

Relevant but again.

Venues when we invest in a venue is often more than $29 million.

And.

So.

No material impact.

From that basis, and we think it is a highly strategic and also will be accretive deal for both parties we hope.

Secondly.

In relation to the debt refinancing earlier this year the company captured a couple of extra $100 million in order to have a war chest for having to potentially self finance some venues.

Yes.

What I continue to hear from the company is that the cap rates haven't gone up and there is competition from the rights for the venues is there some sort of a plan to take some of that.

Pitch it back in and paid down some of the debt given the fact that it has seemed less necessary than it might have earlier.

Especially since the rate rise in the market appears to be for all intensive purposes close to its peak.

Yes, Casey, it's just a matter of timing on that so it does give us financial flexibility, we in essence don't need it but we're going to keep it for the short term just in case.

This is one of these periods of time, where you have to plan for.

The best plan for the but if we are wrong and the consumer weakens, we're going to be able to.

Withstand any type of short term risk so it's ed.

Small price to pay for the strength of the position, we have and the financial flexibility going forward. We have no concerns on the rates right now we have every REIT.

That we were trying to line up for next year is lined up.

And yet they will occasionally be a venue that we won't use rights for that's always been the case there is no change in that plan.

Essentially assume that.

Roughly one per year, we will self finance, we self finance El Segundo.

Those things do happen, we need the flexibility for that.

And in today's environment.

<unk> too close to the edge would be foolish in our opinion, so we have a little bit of extra fleet flexibility going into.

The near future over time, we won't need it.

The next question comes from John David Kernan of TD Cowen Research. Please go ahead.

Yes, Hello, Thanks for taking my question.

Sure Brad.

Ian.

Slide eight on the.

Very thorough deck, you put out earnings presentation deck.

It looks like.

Yeah.

Ramp towards 57 and two.

2026, and that's I.

I think a big chunk of the EPS.

Yes.

From the non-GAAP interest expense and other income reaching 200.

And $90 million on this on this slide I think it's slide 18.

Maybe just talk to.

Why that.

Earlier, but maybe talk to why.

That interest expense in that financing is going to rise to that level.

Well, it's part of the additional venue financing. So part of it is just the stage, where we are and you'll see it increased to 2026, and then youll see it ramp from there and so top top golf has a lot of DNA and interest expense as it builds new venues the DNA starts to fall off.

And as we generate cash flow and pay down the corporate interest.

Interest.

It assumes we pay down debt.

Debt.

That goes up we also assume.

125 basis point reduction in rate each year.

Wishes I think conservative then.

The forward rates.

Okay got it and then just back to top golf itself obviously.

Sizable margin expansion year over year, how do we think about top golf.

On EBITDA margin as we get.

Out of Q4 and into next year and into this 2020, thanks, Craig just given that's pretty.

E Mail natural score.

Yes, we're.

We're not going to give a guide for next year I would say over they do believe they have.

Xtra.

<unk>.

There is more room to go with regard to venue expansion. So that that will continue developing as they implement more initiatives. Yes. The margin. We're telling you will hit 35% by 2025, and we're not too far from that right now so hopefully that's fairly credible, yes, hey, John just and we did provide kind of.

Straight of kind of a walk from the four wall margins to total top golf Abbott, it's on slide 25 in the deck.

So to take a peek at that slide and if you have more questions, let us know we'll.

Thank you.

The next question comes from Eric Wold of B Riley Securities. Please go ahead.

Okay.

Thank you.

Good question.

Yes.

One question two parts on the kind of the top golf on the plan to open eight to nine venue next year that potentially going to ramp back to 11 and 25 in any venue has been completely removed from the pipeline are you merely just shifting everything back.

And if anything has been removed.

What drove those decisions and I have a quick follow up.

We remove venues from the pipeline occasionally because permitting falls through land issues Environmental officer.

Regular course of business if you would.

We're venues enter and exit your forward pipeline as you get further down the path of the development process.

Yes from that perspective, but only as a normal course of business otherwise just shifting venues.

And no change in the Tam.

From that perspective in fact I.

I believe the.

Acquisition of invited.

De risks and improves our probability of getting $2 50, if not more.

And then just a quick follow up but it would be quite wouldn't be meaningful.

Venues next year that were potentially shifted.

Beyond any any kind of I assume those are committed locations. So you kind of view I guess.

Penalties financial impacts from kind of late opening timing kind of holding onto a mobile longer.

No nothing material and what we're doing with this.

Shift is conserving.

Over $100 million of capital over the next two years.

Which will allow us to.

Derisk our cash flows our cash flows are projected positive. This year. They are projected to increase next year. This further de risks that and should allow us to move quicker into a more meaningful debt paydown.

Whatever the operating environment is next year, which.

Some investors have advised that they think would be a prudent move in as we've assessed the situation.

We believe is a good decision in the current circumstance, but then what we said is approximately 11.

That's what we're aiming for.

That is 10 venues or 12 venues or one venue opens in December versus January is.

That's noise that.

The deployment of capital the pipeline, we feel really good about.

The next question comes from Megan Alexander of Morgan Stanley. Please go ahead.

Hi, Thanks for taking our question.

I guess I, just wanted to bigger picture and maybe more high level.

Can you give us some perspective on how you're thinking about the dynamic between pricing and traffic and the top golf venues.

I guess your comments on evaluating the value proposition and taking a look at.

The days of the week, except for Tuesday.

Like how do you think about what pricing and traffic should contribute to same venue sales over a longer period of time.

So, making the long and short of it is we expect to be able to drive both price and traffic over the longer period of time.

And so we are seeing some volatility in the short term but.

And at the risk of confusing you our consumer business was traffic was up during the first half of the year.

It was down slightly in Q3 or was down in Q3.

Our spend per visit was up.

So.

The events business is just dealing with the Covid labs. So the traffic is down on a year over year basis on the events business and as we work through that.

But it will normalize it.

But we believe we will be able to drive an equal amount of price on traffic over the long run.

You kind of see it in the two year stack I'm sure people are tired of hearing that but thats.

You do and.

We're not we haven't seen.

Clearly there is some price sensitivity, we believe during the weekdays, but not on the weekends.

So we're seeing interesting trends, but what you do about those trends and where it will go forward I think it's fair to clear.

Okay. That's helpful. And then just a follow up on the big shots acquisition.

Three of our locations are franchise I guess do you see an opportunity.

Perhaps test the franchise concepts with Bose and longer term, maybe think about franchising out in the U S.

Well we were pretty.

Im pleased with our current returns that we're generating on the business.

With our owned and operated strategy, but clearly we have experience on the franchising side, we franchise the majority of our international Biz.

Business and we will have some experience with them. So we will stay open minded on that but.

The primary plan at the moment has continued to be owned and operated in.

The U S for certain U K and.

But we will pick up a couple of venues that are franchise will continue to operate those under the big shots or they will with us as a franchise or.

And we'll look forward to converting them to top tracer.

The other big shots venue that we did acquire we will convert that to a top golf facility.

This concludes our question and answer session I would like to turn the conference back over to chip Brewer for any closing remarks.

Oh, well I just want to thank everybody for.

Tuning in today and participating in what was a longer call than normal.

Obviously, it had a lot to cover and we wanted to present, some new information that we think will be helpful for evaluating our business. So.

Not an avoidable byproduct of needing to go through all of that and provide this information.

Information, which we think will be highly helpful to investors. We appreciate your interest and we'll look forward to talking to you again in either follow up calls or.

At our next earnings call in early 2024, thank you.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

Q3 2023 Topgolf Callaway Brands Corp Earnings Call

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