Q3 2024 Topgolf Callaway Brands Corp Earnings Call
Shawville, Shetland Co.
Speaker Change: Good day and welcome to the Topgolf Callaway Brand 3rd Quarter 2024 Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions.
Speaker Change: To ask a question, you may press star then 1 on your touchtone phone. And to withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Ms. Katina Metzidakis. Please go ahead, ma'am.
Speaker Change: Thank you operator and good afternoon everyone. Welcome to Topgolf Callaway Brands third quarter earnings conference call. I'm Katina Metzidakis, the company's vice president of investor relations and corporate communications.
Speaker Change: Joining me as speakers on today's call are Chip Brewer, our President and Chief Executive Officer, and Brian Lynch, our Chief Financial Officer and Chief Legal Officer.
Speaker Change: Earlier today, the company issued a press release announcing its third quarter financial results. We have also published an updated presentation. Our earnings presentation, as well as the earnings press release, are both available on the company's investor relations website under the financial results tab.
Speaker Change: Aside from revenue, the financial numbers reported and discussed on today's call are all non-GAAP measures.
Speaker Change: Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations.
Speaker Change: We encourage you to review the Safe Harbor statements contained in the presentation and the press release for a more complete description. And with that, I would now like to turn the call over to Chip Brewer.
Thank you, Katina, and good afternoon, everyone.
Thank you for joining our call today.
Speaker Change: I'm pleased to report Q3 results which came in ahead of our guidance in both our Legacy and Topgolf businesses.
Speaker Change: Focusing first on revenue, Topgolf's same-venue sales came in roughly consistent with our expectations.
Speaker Change: And in our legacy business, we benefited from product shipment timing moving into the quarter from Q4.
Speaker Change: Moving to EBITDA, the quarters out performance was driven by both venue operating efficiencies and cost management at Topgolf.
Speaker Change: We also had slightly favorable effects for the quarter relative to our last guide, but this subsequently shifted against us again in early Q4 and remains a headwind on a full-year, year-over-year basis.
Speaker Change: In the golf equipment segment we continue to lead with 2024 trending to be the third consecutive year that Callaway has earned the number one U.S. market share position in golf clubs.
Speaker Change: as well as the ninth out of the last 10 years in this number one position.
Speaker Change: In the ball business, our investments in the category, along with this year's launch of our new Chrome Tour brand, have driven steadily improving performance and record market shares.
Speaker Change: In Active Lifestyle, Travis Matthew continues to grow share of Wallet through discipline category expansion and distribution.
Speaker Change: As a result, we are lowering our full-year revenue guidance by approximately $30 million to reflect the lower sell-through in that period, a reduction that is spread relatively evenly across the non-top-golf portion of our business.
Speaker Change: However, we view this as short-term volatility rather than a new trend.
Speaker Change: As consumer activity has since picked back up, our brand positions remain strong, and we remain confident in the long-term outlook for our core markets and product categories.
Shifting gears to segment performance, starting with Topgolf.
Speaker Change: Starting with same-venue sales, the business performed roughly consistent with expectations in Q3 at down 11 percent.
Speaker Change: The 1-2 bay performance was balanced fairly evenly between traffic and spend for the quarter.
Speaker Change: For the full year, we're holding our previous guidance for same venue sales to be down very high single digits to low double digits.
Early October results were partially impacted by severe weather.
Speaker Change: but recovered nicely during the month, with the full month performing consistent with our implied Q4 same-venue sales forecast of down 10 to 15 percent.
Speaker Change: Additionally, November and December bookings for 3PLUSBAY events indicate the potential for some improvement relative to recent 3PLUSBAY trends.
Speaker Change: Given all this, if things break our way, we could end up towards the good end of our full year guide.
Speaker Change: However, given the volatility we've seen and the potential for adverse weather this time of year, we're holding our previous guide.
Looking forward on same menu sales.
Speaker Change: The team continues to work on key initiatives to return the business to same-venue sales growth.
Speaker Change: This includes a new game that the team is very excited about, Sonic the Hedgehog, which will launch mid this month and coincides with a new movie coming out in December.
Speaker Change: Exciting new reasons to visit and enhanced consumer experiences such as this are a key part of how we intend to drive long-term traffic growth and thus we are ramping up our ability to deliver these both more frequently and more effectively.
Speaker Change: Beyond this, we're full speed ahead on leveraging our new consumer data platform to provide more targeted promotions and offers to lapsed or new visitors.
Speaker Change: We're also launching new passes and bundles aimed at more frequent visitors.
Speaker Change: We're expanding our partnership programs, and we're further strengthening the team with experts in performance marketing and loyalty programs.
Speaker Change: We're also expanding our outbound sales efforts as well as our offerings for 3 Plus Bay businesses.
Speaker Change: On the EBITDA front, the team continues to deliver excellent results.
Speaker Change: Despite significant sales deleverage this year, we expect to end the year nearly 500 basis points higher in EBITDA margin than in 2019.
This performance, along with other cost-savings initiatives,
Speaker Change: is allowing us to increase our full year EBITDA forecast for Topgolf.
even with no change in the same venue sales forecast.
Speaker Change: We are proud of the team's performance in this important area, and looking ahead, we see significant opportunity for margin expansion when same-venue sales returns to growth.
Speaker Change: On the venue expansion front, we're on track to add seven new owned venues this year.
Speaker Change: The new venues continue to perform consistent with our pro forma.
Speaker Change: In the quarter, we open in Greensboro, North Carolina, and Des Moines, Iowa.
Both venues are performing well.
By year's end, we'll have 100 owned and operated venues.
Speaker Change: Looking forward, we expect to build and open approximately five domestic venues in 2025.
Shifting Gears to our Golf Equipment Business
Speaker Change: The market remains strong overall, with U.S. rounds up nicely year over year.
Speaker Change: building on the gains in participation we have seen over the last several years and despite a small decline in playable hours year-to-date due to slightly unfavorable weather.
Speaker Change: As previously mentioned, DataTek's U.S. sell-through for clubs was down a little more than expected in Q3 at minus 4%, but remains flat year-to-date, which is a reasonably good performance in today's macroeconomic climate.
Speaker Change: South River Golf Balls was flat in Q3 but is up year-to-date as has been its trend and as you would expect given the rounds played data.
Speaker Change: Furthermore, the U.S. club market sell-through results for the second half of September and October bounced back nicely, making me think the small dip in Q3 sell-through was nothing more than normal volatility.
Speaker Change: Within these market conditions, the Callaway Club brand remains strong and continues to resonate with consumers.
Speaker Change: including, according to outside research, the sustained leadership position in technology and innovation.
Speaker Change: In the market, Callaway remains the overall number one market share club brand in the U.S. as measured by DataTek's sell-through dollar market share, a position we have enjoyed for nine out of the last ten years.
Speaker Change: During this year, we've had a particularly strong year in woods, with the AI smoke line propelling us to leadership positions in the driver, fairwood, and hybrid categories, as well as the number one selling model in irons.
We've also had a terrific year in putters.
Speaker Change: with Odyssey dominating the tour counts including 39 consecutive PGA tour counts extending from the opening event in Hawaii
through the FedExCup Championship and including all four majors.
Speaker Change: Odyssey was in the bag of 14 winners on the PGA Tour and 52 winners across primary global tours.
Speaker Change: Globally, our year-to-date putter category dollar market share is up 344 basis points in the US, 240 basis points in Europe, and 709 basis points in Japan.
Speaker Change: In golf ball, we continue to steadily deliver market share and brand growth, as well as operational improvement.
Speaker Change: Our Q3 U.S. market share of 21.8% is up 140 basis points year-over-year and represents a new record for us.
Speaker Change: Additionally, we have now fully worked through our vendors ball plant fire of a year ago with that plant rebuilt and back online as well as additional capacity developed.
Speaker Change: and we continue to drive yield and productivity improvements in our Chicopee mass facility where all our premium or tour products are manufactured to industry-leading quality and consistency standards.
Speaker Change: On the brand side of golf ball, we also continue to make strides. For a Golf Data Tech Summer Ball GPAU report, Cataway's ranking as preferred ball, as measured by the question,
Speaker Change: If you were playing in your club championship this weekend, which ball brand would you use jump from 16% to 21%? The highest level since tracking began and the first time any brand other than Titleist exceeded 20%.
Speaker Change: We, of course, also had a few weak points this year, including foreign exchange, which is obviously outside of our control.
volatile freight rates, which Brian will discuss later.
Speaker Change: in a slower-than-expected Korea market, where we initially lost some share, but we now see signs of both that market starting to stabilize and our relative performance improving, driven by a new team with renewed energy and resolve.
Speaker Change: Looking at product category opportunities, the Q3 launches of our Opus wedges and Apex AI irons
Speaker Change: are both going well, and we think these will sure up what has been relatively weak for us year-to-date performances in these categories.
Speaker Change: The iron category is a big category, one where we have been a historical leader and one where the trade is telling us that we are well positioned to gain share over the next year based on the strength of our product line.
Speaker Change: While we're on product launches, building on our strong recent performance in the putter category, we'll be formally announcing later this week our entry into a new form of putting most commonly described as zero torque.
be a new model for us called square-to-square.
Speaker Change: Zero torque is an interesting category which is experiencing rapid growth.
Speaker Change: As we enter this category, we believe we can use our proprietary shapes, insert, and AI technology to deliver an even better product to golfers than is currently available in the category.
The square-to-square product will be available to consumers in December.
Speaker Change: Looking forward, we feel good about both our golf equipment business and the market.
Speaker Change: Our product pipeline remains strong, and we've started to show our 2025 product line to customers and are receiving positive feedback.
Turning now to the Active Lifestyle segment.
Speaker Change: Revenues and earnings were both down for the quarter, but this was largely consistent with expectations.
Speaker Change: and it masks fundamental improvements that we're making in all businesses within this segment.
turning to each business unit.
Speaker Change: At Travis Matthew, the overall market continues to be relatively soft, with DataTek showing U.S. sell-through of golf shirts to be down approximately 9% in its channels.
Speaker Change: But the Travis Matthew brand continues to outperform the market based on strong market share in its core men's product lines.
Speaker Change: further expansion into strategic categories such as outerwear and women's and the addition of another 10 owned retail stores.
Speaker Change: On the retail storefront, we now have 57 owned retail stores and direct-to-consumer overall is approximately 40% of our business.
Speaker Change: The retail stores are high ROI investments and also drive brand growth and wholesale volumes in their markets.
as mentioned on previous calls.
Speaker Change: This year's financial performance has also been challenged by the timing of a large corporate channel stocking order that occurred in 2023 and that did not repeat this year, but that opened up a new line of business for the long run.
excluding that specific corporate channel timing.
Speaker Change: Travis Matthew is up year over year both on the top and bottom line. This is a growing and profitable business with a bright future.
Speaker Change: At Jack Wolfskin, the business has been challenged by difficult market conditions in Europe and outside of China, where we continue to perform very well, this business remains a turnaround story.
Speaker Change: With new leadership in place here, we have been rescaling our cost base to fit the current revenue base of the business, while at the same time working on a product market fit in Europe by refocusing on the brand's core product and positioning.
Speaker Change: All of this turnaround work remains a work in progress, and Jack Wolfskin remains a relatively small part of our overall story.
Speaker Change: However, I feel better about the mid to long-term outlook for this business.
Speaker Change: As sell-through in Europe picked up in late Q3 and early Q4, China continues to perform well.
Speaker Change: And by the end of this year, we will have a significantly smaller cost base as well as a more focused Europe product strategy.
Speaker Change: Lastly, in the active lifestyle segment, the Callaway and Ogio brands are both performing reasonably well in the US and Europe.
Speaker Change: In Japan, both apparel and performance gear are performing well on a local currency basis year-to-date, but showed down when restated in U.S. dollars due to foreign exchange.
Speaker Change: and our Korea business is down consistent with both the market and our struggles there, but as previously mentioned we see improved signs for both our brand and that market in general.
In conclusion,
Q3 was a good quarter for us operationally.
Speaker Change: We remain pleased with the direction of our legacy business where we're building on our strengths and addressing any weaknesses head on.
At Topgolf, we perform largely consistent with recent trends.
Speaker Change: including continuing to drive excellent venue profitability given the slower top-line environment.
Speaker Change: and we're taking steps to further strengthen the team's ability to drive positive same-venue sales over the long term.
Speaker Change: On the strategic front, we continue to believe that separating Topgolf from the legacy business will maximize shareholder value, and we are fully engaged on this work.
Speaker Change: I look forward to providing further updates, as appropriate, on future earnings calls. Brian, over to you.
Thank you, Chip, and good afternoon, everyone.
Brian Lynch: As Chip mentioned, we are pleased with our third quarter results in light of the macroeconomic backdrop.
Brian Lynch: Our business units delivered solid execution, which combined with the shift in timing of shipments in our products businesses
Brian Lynch: as well as slightly favorable foreign currency allowed us to exceed our guidance for Q3.
Brian Lynch: As we look forward, our business segments are continuing to take action to manage their businesses in the current environment.
Brian Lynch: holding or building their market positions and staying focused on managing costs and available liquidity.
Some highlights for the quarter include
Q3 revenue and adjusted EBITDA were ahead of expectations.
Brian Lynch: We continue to manage through a softer top-line environment with a focus on discipline cost management, operating efficiencies, and cash management.
Brian Lynch: Cash provided by operating activities for the first nine months increased $111 million, or 49%, compared to the first nine months of 2023.
Brian Lynch: Our inventory reduction initiatives continue to be successful, with our consolidated inventory decreasing $70 million since Q3 last year.
Brian Lynch: Our REIT-adjusted net debt decreased approximately 220 million dollars, or over 20% year-over-year, and our REIT-adjusted net debt leverage decreased to 1.8 times from 2.1 times.
Brian Lynch: We further strengthened our available liquidity position to $863 million, representing a $129 million increase year-over-year.
Now turning to the specifics.
Q3 consolidated revenues of $1.013 billion decreased 3% year-over-year.
Brian Lynch: This decrease was largely attributable to an 11% decrease in active lifestyle revenue, primarily due to an expected decrease in Jack Wolfskin revenue, which reflects the continued soft-to-peril wholesale market conditions in Europe.
Brian Lynch: Q3 Adjusted EBITDA of $120 million declined 27% compared to the third quarter last year. I'll describe the reasons for this in my discussion of segment performance.
Now moving to segment performance.
Brian Lynch: At Topgolf, Q3 revenue grew 1% to $453 million, driven by the new venues open since Q3 last year.
Brian Lynch: Our new venues are performing well and are achieving previously communicated financial targets and returns.
Brian Lynch: This increase was partially offset by an 11% decrease in same venue sales.
Brian Lynch: Top Cop operating income was $28 million, down $11 million compared to the prior year, primarily due to increased depreciation related to the new venues, combined with operating expense delivered due to the decrease in same venue sales.
Topgolf adjusted EBITDA decreased 7% year-over-year to $84 million.
Brian Lynch: EBITDA margins remain strong due to continued good execution amid the decline in same-venue sales.
Brian Lynch: The golf equipment segment had a strong quarter based primarily on this year's new club and ball launches offset by lower sales of older products as we have largely cleaned up our inventory of older product over the last year.
Revenue was up slightly at $294 million.
Brian Lynch: This better-than-expected result was primarily due to a shift in shipment timing.
Brian Lynch: Scott's equipment operating income of $27 million decreased $8 million, primarily due to a year-over-year increase in freight costs.
Brian Lynch: In our Active Lifestyle segment, Q3 revenue decreased 11% year over year.
Brian Lynch: This decrease is mainly due to lower sales at Jack Wolfskin, due to continued softness in the European wholesale apparel market.
Brian Lynch: Jack Wolskin's business in China, however, continues to perform well, showing growth during this period.
Brian Lynch: Operating income decreased to 21 million dollars compared to 40 million dollars in the prior year.
Brian Lynch: primarily due to the lower revenue volume along with higher freight costs.
Brian Lynch: Moving to balance sheet and liquidity, our available liquidity, which is comprised of cash on hand and incremental borrowing capacity under our credit facilities, continue to strengthen during the quarter.
Brian Lynch: As of September 30th, our available liquidity increased $129 million to $863 million compared to the prior year due to better cash flow generation as the company continues to manage working capital.
Brian Lynch: At Quarter End, we have a total net debt of $2.3 billion, which per our usual practice excludes convertible debt of approximately $258 million.
compared to $2.1 billion for the same time last year.
Brian Lynch: This increase is attributable to increased venue financing debt related to new venues, partially offset by a reduction in term loan debt, including our second quarter discretionary $50 million term loan B principal paydown.
Brian Lynch: We think it is helpful to evaluate our net leverage position by excluding the REIT debt associated with our top cop venue financing, which is akin to capitalized rent with no additional principal or bullet repayment.
Brian Lynch: In Q3, our readjusted net debt was $841 million, over $220 million lower versus last year.
Brian Lynch: Our net debt leverage, which excludes convertible debt, was 4.1 times as of September 30, 2024, compared to 3.8 times in the prior year.
This increase was primarily due to increased venue financing debt.
Brian Lynch: Importantly, our REIT Adjusted Net Debt Leverage Ratio, which burdens EBITDA with the REIT Interest Expense Payments, which are akin to rent, and which we believe is the most appropriate way to look at our leverage, declined to 1.8 times from 2.1 times in the prior year.
We remain comfortable with these leverage levels.
Brian Lynch: With regard to new venues, we are on track to open seven new venues this year, including one we acquired as part of the Big Shots transaction, but which is now being converted to a TopCop.
We expect to open approximately five new venues in 2025.
Brian Lynch: Our inventory balance decreased $70 million, or 10%, to approximately $667 million at the end of Q3 2024.
Brian Lynch: We feel good about the current level and quality of our inventory.
Brian Lynch: Year-end inventory levels will depend on whether we receive some of the 2025 launch products at the end of December or beginning of January.
Brian Lynch: Gross capital expenditures for the first nine months of 2024 were $227 million and we received reimbursement of $88 million from our financing partners for net capital expenditures of approximately $139 million.
Brian Lynch: Shifting gears, we are lowering our outlook for free cash flow to mentor it with our change in our EBITDA forecast.
Brian Lynch: We now expect free cash flow to be approximately $115 million compared to $130 million in our prior guidance.
Brian Lynch: As mentioned earlier, the timing of the receipt and payment of that inventory could affect the forecasted cash flow.
Brian Lynch: From a net capex perspective, we continue to expect approximately $190 million for the full year, with $60 million coming from the non-TopGov business and $130 million coming from TopGov.
Now turning to our full year 2024 outlook.
Brian Lynch: We are adjusting our full year 2024 revenue guidance to approximately $4.2 billion, which is the low end of our previous guidance.
Brian Lynch: This reflects a $30 million or less than 1% reduction from the midpoint of our prior guidance due to lower than expected consumer activity in Q3, which affects sell-through in that quarter and in turn reorder business in Q4.
Brian Lynch: Consumer activity has since improved and thus it is our opinion that what we saw in Q3 appears to be just short-term volatility rather than a trend.
Brian Lynch: As a result of the lower revenue guide, we are also lowering our EBITDA guidance range by $15 million from the prior guidance midpoint to a range of $560 million to $570 million, with $570 million being the low end of our prior guidance.
Brian Lynch: At Topgolf, we are reiterating our annual guide of approximately 1.79 billion dollars in revenue and increasing our adjusted EBITDA guide by 5 million to 315 million, largely due to continued strength in venue margins and cost management initiatives.
Brian Lynch: Moving to Q4, we are lowering our implied guidance to reflect the shift in timing of shipment between Q3 and Q4, as well as slower than expected consumer activity in Q3.
Brian Lynch: We are now forecasting Q4 consolidated revenue of approximately $885 million and adjusted EBITDA in the range of $74 million to $84 million, compared to $897 million in revenue and $70 million in EBITDA respectively in the prior year.
Brian Lynch: The increase in adjusted EBITDA is anticipated to be due to the expected improvement and gross margins in the GOF equipment business.
Speaker Change: In Q4 Topgolf, we expect to be down mid-single digits in revenue compared to last year due to an expected decrease in same-menu sales as Chip discussed earlier.
Speaker Change: Top Coffee, Justin Ibudao is expected to be down approximately 12 million dollars year over year due to the anticipated decrease in same-venue sales, partially offset by continued operational efficiencies in the venues.
Speaker Change: In conclusion, we are pleased we were able to exceed our Q3 targets. Though the broader consumer discretionary backdrop was a little choppy in Q3, participation and interest in the game of golf remains strong, as do our leadership positions in golf equipment, golf entertainment, and active lifestyle.
Speaker Change: We're proud of our team's ability to continue to find operational efficiencies and show disciplined cost management, particularly at Topgolf, where we raised our 2024 EBITDA outlook despite holding the revenue back.
Speaker Change: We remain on strong financial footing with a solid balance sheet, including lower year-over-year REIT-adjusted net debt leverage, healthy inventory levels, and a strong liquidity position.
Speaker Change: And perhaps most importantly, we continue to expect to generate positive free cash flow this year at both the Total Company and Topgolf.
Speaker Change: With that said, I would now like to turn the call back over to the operator for Q&A.
Speaker Change: Thank you. We will now begin the question and answer session.
Speaker Change: If at any time your question has been addressed, and you would like to withdraw your question, please press star, then 2. And at this time, we'll pause momentarily to assemble a roster.
and Katina Metzidakis.
and Katina Metzidakis.
Speaker Change: And the first question will come from Matthew Bost with J.P. Morgan. Please go ahead.
Matthew Bost: Great, thanks. So, Chip, maybe just to kick off, at Topgolf, could you help break down recent traffic versus average spend that you've seen at the concept, or any notable recent trends to call out in the consumer versus event segment? And maybe as we look to 2025,
Sure. Thanks, Matt.
Speaker Change: So, you know, recent trends at Topgolf were relatively balanced in the impact of spend per visit and traffic.
Speaker Change: So, you know, that 9% down on the consumer business was roughly split evenly between those two factors.
Speaker Change: Trends that look a little more favorable on the three plus Bay events as we look forward
Speaker Change: And as we look forward at Topgolf, you know, in terms of building that back to positive same-venue sales, there are multiple initiatives that are underway.
Speaker Change: the implementation of the consumer data platform. All of those are important measures and they're impactful. We're strengthening the leadership team there.
Speaker Change: The thing that I think will be the most impactful over the long term is continuing to build on the quality of the experience.
and the reasons to visit. So you see things like...
Speaker Change: the new game that we launched this year, earlier in the year, the Block Party game.
Speaker Change: You saw then the Sure Thing Golf Club in the middle of the year.
Speaker Change: and now we just announced this cool new game in partnership with
Speaker Change: Sega called Sonic the Hedgehog and that is getting launched You know right ahead of their introduction of the movie
Speaker Change: And so I played the game. It's fantastic. It creates new energy, excitement, things to talk about, reasons to new visitors to visit, and also people to come back again.
Speaker Change: And so you're seeing us improve and increase our frequency of these activities. You're going to see that on a macro level. You're going to see it on a local level.
Speaker Change: And so both with efficiency and frequency, those reasons to visit I think are a critical element of how we're going to drive positive same venue sales over time.
Speaker Change: And then maybe just a follow-up on golf equipment. Could you elaborate on the recent improvement that you cited in sell-through trends in the fourth quarter relative to some of the softness that sounded like in the third quarter and just how you see overall health of channel inventories for golf equipment?
Speaker Change: Rounds played are up, you know, and they're up on record levels. Participation continues to increase, you know, but you're always going to have a little bit of volatility. And you saw, you know, one stat there being the club business in the U.S.
Speaker Change: It was down about 4% in Q3. You know, it had been, you know, flat or up slightly. It is flat for the full year.
Speaker Change: And, you know, that is nothing more than volatility. We see in September that the market already returned to some positive sell-through. It is the same in October.
Speaker Change: stayed where it was. It went down a small dip, subsequently returned, and you really can see in many different ways the health of the overall market conditions and our strength of brand position in it.
It's great color. Thanks. Best of luck.
Thanks, Matt.
Speaker Change: The next question will come from Michael Schwartz with Atreus Securities. Please go ahead.
Michael Schwartz: Hey, good afternoon. Maybe just to start with, on top goss, I think, you know, the quarter finish...
I think that scales down about 11 percent, I think.
Michael Schwartz: in other words, your trends kind of running at the downloadable digit in the entire quarter.
You know, there was volatility through the quarter, Michael.
Michael Schwartz: August was a little better, September was a little bit worse.
Michael Schwartz: But nothing to speak of from that regard. We've seen those small periods of volatility. You know, the consumer portion is stronger than the 3 plus Bay. The 3 plus Bay, you know, down more than it had been.
Michael Schwartz: in that particular quarter, within that three-plus bay, we saw a little bit of a decline in larger events as opposed to the more smaller or mid-size events.
Michael Schwartz: But again, that itself has then moderated, so we no longer really see that, and we've also taken some steps to address that.
And the hurricane impact that you were talking about,
Michael Schwartz: there was in September, although there was a touch in September, but there candidly, there's always going to be some of that in this time of year, so we really didn't want to
belabor that. As you look forward, we've got a
Tough comp in December.
As you correctly identified, the same venue's trends were
Michael Schwartz: consistent with what we expected and as I've already called out, we have
Michael Schwartz: potential for some upside on the 3 plus Bay events, but too soon to be conclusive.
Speaker Change: Okay, that's super helpful. Thanks, Chip. And maybe just a follow-up question. I know that timing of product launches can shift between quarters. That's not out of the ordinary, but any sense of how much that pulled into the third quarter and subsequently pulled out of the fourth quarter?
Brian Lynch: You know, do you want to take that one, Brian? Sure. The majority of the change, the amount we beat the guide by, the substantial majority of that was shipment timing.
from Q4 to Q3.
Speaker Change: The next question will come from Joe Altobello with Raymond James. Please go ahead.
Joe Altobello: Thanks, hey guys, good afternoon. The first question on the guide for same venue sales for 4Q, down 10 to 15. It's rather wide, particularly since we're basically halfway through the quarter here. Are you guys building in some cushion for weather, or is that just a lack of visibility into underlying trends at this point?
No, it is wide because of the potential for weather.
Speaker Change: obviously the potential for weather in Q4 and the impact that would have because December is the big month of the year particularly with the event side of the business and you know the weather would be impactful in that.
Speaker Change: We're definitely fully engaged on the process of separation of Topgolf, and we believe that'll maximize shareholder value. We're evaluating both spin and sale.
Speaker Change: And, you know, we still would expect that if it's a spin as the outcome, that it would happen as... the earliest it would happen is mid-next year, but that would be our target date.
Okay, great. Thank you
Speaker Change: The next question will come from Eric Wold with B. Riley Securities. Please go ahead.
Thank you.
Eric Wold: Thanks. Good afternoon. I appreciate you taking my questions. A couple of questions. I guess one...
Speaker Change: You noted, on Topgolf, you noted that the recent trends were fairly balanced between traffic and spend-per-visit, but any any shifts from...
Speaker Change: the last quarter call to now in terms of you know midweek versus weekend business and then on the on the three plus day business you mentioned obviously that some improvements or some potential improvements heading into the holidays for what you're seeing for November-December any any shifts in the type of events?
Speaker Change: that are booking that surprise year that would have been different from prior trends or expectations?
Sure. We really haven't, Eric, seen any...
Speaker Change: you know, meaningful shift. Earlier in the year, we saw, you know, traffic get down a little bit more and the mix of impact was a little more traffic-weighted than spend. You know, it's a little more balanced now.
Speaker Change: and, you know, no change in our outlook for type of event as we look forward.
Speaker Change: And then, you know, follow up on Topgolf, I know now you're saying, you know, five openings for next year. I'm assuming we get a little more color on Topgolf kind of plans closer to the spin.
Speaker Change: But ahead of that, have there been any changes to the pipeline at this point in terms of
Speaker Change: Besides the venue you would have previously expected versus what you now have in the pipeline, a city that may have made sense before, which may not, or as a result, that's pretty much unchanged.
Speaker Change: You know, we've made adjustments to the number of venues that we're opening from time to time as, you know, reflecting business conditions and the, you know, desire to
Speaker Change: you know, types of venues, etc. Our pipeline remains excellent. Our returns remain excellent.
Speaker Change: and so only changes as we've talked and you've listened to us in terms of the number of venues we've and we're just responding to the market conditions and projections
Thank you.
Speaker Change: The next question will come from Megan Clapp with Morgan Stanley. Please go ahead.
Hi, good afternoon. Thanks for taking our question.
Speaker Change: Wanted to ask again about Topgolf and just maybe get a little bit of your perspective on the same venue sales performance sitting here a Couple months after things, you know seem to deteriorate You know, I know it was in line with your expectations, but if I
Speaker Change: Look at your slides. It does look like the stacks on a multi-year basis did deteriorate pretty significantly here again in 3Q.
Speaker Change: And, you know, if I recall when we were sitting here in July or August when you reported 2Q, you know, you spoke to a drop-off, and, you know, it was a little bit, I guess, unclear at the time as to what drove that. So, as you've had more time to assess the trends you're seeing, are you able to better parse?
Speaker Change: what is the macro in a tough consumer environment versus what maybe is a little bit more execution or process related, I guess.
Speaker Change: Just said differently, like I understand the macro isn't helpful, but it does seem like, you know, down 11% comps are a bit worse than what we're seeing from some other public entertainment companies. So just trying to understand if there's something more idiosyncratic that you can identify.
Speaker Change: Sure, Megan. So, if you look at our business, the, you know, the volatility and the significant down is all in the 3 plus Bay event, in my opinion. So, if you look at the two-year stacks, they're down 36 percent. You know, that's big.
Speaker Change: and you also see some volatility there where it was down 9% in Q2 and down 19% in Q3.
Speaker Change: You know, but you look back and you see up 23% on the same page. So, you know, it's a relatively volatile category and it's going through two different things in our opinion, one being a reversion.
Speaker Change: from a surge, which was late post-COVID, and the second is just an economic slowdown. And then the
Speaker Change: I don't see a major change there. You know, I see a steadily weaker consumer environment where the consumer discretionary is
Speaker Change: increasingly under pressure, and clearly Topgolf is being impacted by that. But I don't see what you're talking about in regarding a significant change there. I see a...
Speaker Change: A gradual, if you would, change that obviously we're committed to working on.
Speaker Change: The same venue sales are an area where we're clearly focused and we think we've got opportunity for improvement.
Speaker Change: is stabilizing. And the reason I ask is if I carry that 3Q trend forward, you know, I could get to a scenario that comps could remain negative, at least through the first part of next year. So, you know, is that fair? And, you know, I think you said, Chip, you're working to improve.
showing some positive indications based on our bookings.
Speaker Change: But even then I'm not guiding specifically to that at this point. So You know, I'm not going to be able to answer your question directly on You know forecasts for next year on top-down same-venue sales
Okay, fair enough. Thank you, Chip.
Thank you.
Speaker Change: The next question will come from Casey Alexander with Compass Point Research and Trading. Please go ahead.
Speaker Change: Hi, good afternoon. I'm wondering, Chip, can you possibly put a finer point on some of the Topgolf promotional efforts that you engaged in starting in the second and third quarter?
Speaker Change: Is that having more of an impact on One and Two Bay because that seemed more retail oriented than corporate oriented and is there something else that you could do or put in place that could help drive a better and faster recovery in the corporate or three plus bay business?
Speaker Change: entirely focused on the consumer side. It doesn't mean we're not doing some activity on the corporate side, but they are what you hear us talk about, for instance, the Free 30 promotion. That is a consumer-oriented promotion.
Speaker Change: Consumer-oriented promotions have now evolved, so if you look at Free 30,
Speaker Change: We now, as we've implemented the consumer data platform and we're able to segment our data and consumers more accurately, we're targeting that promotion specifically at lapsed and new visitors.
and so our returns on our ad...
Speaker Change: digital spend are going to go up significantly. We're already seeing that, you know, we're able to segment that data much more cleanly now and more effectively, and we're mixing it
Speaker Change: in a much more efficient manner. And, you know, that's part of the skill set that we're developing now and we'll think we'll certainly.
increase our effectiveness going forward.
Speaker Change: On the corporate side, you know, we're obviously not sitting back and doing nothing. We're generating improved outbound sales efforts there, bringing in a lot of sales management capability and skills. We're also offering some
different promotions, if you would, specifically aimed at corporate events.
Speaker Change: but it is a little less subject to being promotional oriented, right? If you're a corporation and you've got a ban on any corporate events, it doesn't matter if I discount it or not, they're not, there's a ban.
Speaker Change: and so we think that the promotional activity that we're able to implement now which is fairly selective using the consumer data platform will be more effective.
Okay, great. Thank you for that answer.
Speaker Change: Secondly, when I look at slide number 11 that is projecting $70 million of adjusted free cash flow for Topgolf in 2024.
Speaker Change: When I think about the fact that you've downscaled to five venue openings in 2025, how should I think of that impacting that 2024 outlook for adjusted free cash flow for Topgolf?
Speaker Change: Slide 11, the 2024 Topgolf Outlook projects $70 million of adjusted pre-cash flow.
Speaker Change: So I'm wondering, you slow the venues down, does that drive a better number in 2025?
Oh, and 25.
Uh...
Warren, do you want to?
Speaker Change: Yeah, we're not. We're not really providing guidance on 2025 at this point, Taci.
Speaker Change: But other than, you know, one thing I would point out if you're starting to model 2025 is though, we do anticipate a couple of potential headwinds in 2025.
Speaker Change: One, we're going to reset incentive compensation accruals back to target levels and current FX rates would be a headwind.
Speaker Change: But we'll provide more color at the next earnings call on both that and the free cash flow at TopGov.
And you're on right, Casey, go ahead.
Speaker Change: The lower, you know, less, building less venues will generate more, will positively impact cash flow in 25.
Speaker Change: I'm pretty sure every analyst already has a 2025 model working right now. Thank you. Appreciate you taking my question. Sure. Thank you.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to our CEO, Mr. Chip Brewer, for any closing remarks. Please go ahead.
Chip Brewer: All right, I will thank everybody for their time on the call today. We appreciate it and we look forward to updating you again in February. Have a great holiday season.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Thanks for watching.
Speaker Change: Good day, and welcome to the Topgolf Callaway Brand 3rd Quarter 2024 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions.
Speaker Change: To ask a question you may press star then one on your touchtone phone and to withdraw your question Please press star then two. Please note. This event is being recorded. I would now like to turn the conference over to Miss Katina Metzidakis, please go ahead ma'am
and Katina Metzidakis.
Speaker Change: Thank you, operator, and good afternoon, everyone. Welcome to Topgolf Callaway Brand's third quarter earnings conference call. I'm Katina Metzidakis, the company's vice president of investor relations and corporate communications. Joining me as speakers on today's call are Chip Brewer, our president and chief executive officer, and Brian Lynch, our chief financial officer and chief legal officer.
Speaker Change: Earlier today, the company issued a press release announcing its third quarter financial results. We have also published an updated presentation. Our earnings presentation, as well as the earnings press release, are both available on the company's Investor Relations website under the Financial Results tab.
Speaker Change: Aside from revenue, the financial numbers reported and discussed on today's call are all non-GAAP measures.
Speaker Change: We identify these non-GAP measures in the presentation and reconcile the measures to the corresponding GAP measures in accordance with Regulation G.
Speaker Change: Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations
Speaker Change: We encourage you to review the Safe Harbor statements contained in the presentation and the press release for a more complete description. And with that, I would now like to turn the call over to Chip Brewer.
Thank you, Katina, and good afternoon, everyone.
Thank you for joining our call today.
Speaker Change: I'm pleased to report Q3 results which came in ahead of our guidance in both our Legacy and Topgolf businesses.
Speaker Change: Focusing first on revenue, Topgolf's same venue sales came in roughly consistent with our expectations.
Speaker Change: And in our legacy business, we benefited from product shipment timing moving into the quarter from Q4.
Speaker Change: Moving to EBITDA, the quarters out performance was driven by both venue operating efficiencies and cost management at Topgolf.
as well as the shipment timing in our legacy business.
Speaker Change: We also had slightly favorable FX for the quarter relative to our last guide, but this subsequently shifted against us again in early Q4 and remains a headwind on a full year, year-over-year basis.
Speaker Change: In the golf equipment segment we continue to lead with 2024 trending to be the third consecutive year that Callaway has earned the number one US market share position in golf clubs.
Speaker Change: as well as the ninth out of the last 10 years in this number one position.
Speaker Change: In the ball business, our investments in the category, along with this year's launch of our new Chrome Tour brand, have driven steadily improving performance and record market shares.
Speaker Change: In Active Lifestyle, Travis Matthew continues to grow share of Wallet through disciplined category expansion and distribution.
Speaker Change: On the other hand, in the golf equipment segment and at Travis Matthew, we saw slightly slower market conditions than expected in Q3.
Speaker Change: As a result, we are lowering our full-year revenue guidance by approximately $30 million to reflect the lower sell-through in that period, a reduction that is spread relatively evenly across the non-top-golf portion of our business.
Speaker Change: However, we view this as short-term volatility rather than a new trend.
Speaker Change: As consumer activity has since picked back up, our brand positions remain strong, and we remain confident in the long-term outlook for our core markets and product categories.
Shifting gears to segment performance, starting with Topgolf.
Speaker Change: Starting with same-venue sales, the business performed roughly consistent with expectations in Q3 at down 11 percent.
Speaker Change: 1-2 Bay was down approximately 9% and 3-plus Bay was approximately down 19%.
Speaker Change: The 1-2 bay performance was balanced fairly evenly between traffic and spend for the quarter.
Speaker Change: For the full year, we're holding our previous guidance for same venue sales to be down very high single digits to low double digits.
Speaker Change: Early October results were partially impacted by severe weather, but recovered nicely during the month, with the full month performing consistent with our implied Q4 same-venue sales forecast of down 10 to 15 percent.
Speaker Change: Additionally, November and December bookings for 3PLUSBAY events indicate the potential for some improvement relative to recent 3PLUSBAY trends.
Speaker Change: Given all this, if things break our way, we could end up towards the good end of our full year guide.
Speaker Change: However, given the volatility we've seen and the potential for adverse weather this time of year, we're holding our previous guide.
Looking forward on same menu sales.
Speaker Change: This includes a new game that the team is very excited about, Sonic the Hedgehog, which will launch mid this month and coincides with a new movie coming out in December.
Speaker Change: Exciting new reasons to visit and enhanced consumer experiences such as this are a key part of how we intend to drive long-term traffic growth, and thus we are ramping up our ability to deliver these both more frequently and more effectively.
Speaker Change: Beyond this, we're full speed ahead on leveraging our new consumer data platform to provide more targeted promotions and offers to lapsed or new visitors.
Speaker Change: We're also launching new passes and bundles aimed at more frequent visitors.
Speaker Change: We're expanding our partnership programs, and we're further strengthening the team with experts in performance marketing and loyalty programs.
Speaker Change: We're also expanding our outbound sales efforts, as well as our offerings for 3 Plus Bay businesses.
Speaker Change: On the EBITDA front, the team continues to deliver excellent results.
Speaker Change: Despite significant sales deleverage this year, we expect to end the year nearly 500 basis points higher in EBITDA margin than in 2019.
This performance, along with other cost-savings initiatives,
Speaker Change: is allowing us to increase our full year EBITDA forecast for Topgolf.
even with no change in the same venue sales forecast.
Speaker Change: We are proud of the team's performance in this important area, and looking ahead, we see significant opportunity for margin expansion when same-venue sales returns to growth.
Speaker Change: On the venue expansion front, we're on track to add seven new owned venues this year, six of which we built and one acquired.
Speaker Change: The new venues continue to perform consistent with our pro forma.
Speaker Change: In the quarter, we open in Greensboro, North Carolina, and Des Moines, Iowa.
Both venues are performing well.
By year's end, we'll have 100 owned and operated venues.
Speaker Change: On the international front, our franchisees recently opened two new venues, one in Jakarta and one in Wuhan, China, for a total of seven franchised international venues.
Speaker Change: Looking forward, we expect to build and open approximately five domestic venues in 2025.
Shifting Gears to our Golf Equipment Business
Speaker Change: The market remains strong overall, with U.S. rounds up nicely year-over-year, building on the gains in participation we have seen over the last several years, and despite a small decline in playable hours year-to-date due to slightly unfavorable weather.
Speaker Change: As previously mentioned, DataTek's U.S. sell-through for clubs was down a little more than expected in Q3 at minus 4 percent.
Speaker Change: but remains flat year-to-date, which is a reasonably good performance in today's macroeconomic climate.
Speaker Change: South River Golf Balls was flat in Q3 but is up year-to-date as has been its trend and as you would expect given the rounds played data.
Speaker Change: Furthermore, the U.S. club market sell-through results for the second half of September and October bounced back nicely, making me think the small dip in Q3 sell-through was nothing more than normal volatility.
Speaker Change: Within these market conditions, the Callaway Club brand remains strong and continues to resonate with consumers.
Speaker Change: including, according to outside research, the sustained leadership position in technology and innovation.
Speaker Change: In the market, Callaway remains the overall number one market share club brand in the U.S., as measured by DataTek's sell-through dollar market share.
Speaker Change: a position we have enjoyed for nine out of the last ten years.
Speaker Change: During this year, we've had a particularly strong year in woods with the AI smoke line propelling us to leadership positions in the driver, fairwood, and hybrid categories, as well as the number one selling model in irons.
We've also had a terrific year in putters.
Speaker Change: with Odyssey dominating the tour counts including 39 consecutive PGA Tour counts extending from the opening event in Hawaii through the FedExCup Championship and including all four majors.
Speaker Change: and Odyssey also won every count this year on the LPGA, Champions and DP World Tours. Clean sweeps across those tours.
Speaker Change: Odyssey was in the bag of 14 winners on the PGA Tour and 52 winners across primary global tours.
Speaker Change: Globally our year-to-date putter category dollar market share is up 344 basis points in the U.S.
Speaker Change: 240 basis points in Europe and 709 basis points in Japan.
Speaker Change: In golf ball, we continue to steadily deliver market share and brand growth, as well as operational improvements.
Speaker Change: Our Q3 U.S. market share of 21.8% is up 140 basis points year-over-year and represents a new record for us.
Speaker Change: Additionally, we have now fully worked through our vendors ball plant fire of a year ago with that plant rebuilt and back online as well as additional capacity developed.
Speaker Change: and we continue to drive yield and productivity improvements in our Chicopee Mass Facility where all our premium or tour products are manufactured to industry-leading quality and consistency standards.