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Topgolf Callaway Brands (NYSE: MODG)
Q3 2024 Earnings Call
Nov 12, 2024, 5:00 p.m. ET

Key Takeaways from Topgolf Callaway’s Q3 2024 Earnings Call

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Topgolf Callaway Brands third quarter 2024 conference call. [Operator instructions] Please note that this event is being recorded. I would now like to turn the conference over to Ms. Katina Metzidakis.

Please go ahead, ma’am.

Katina Metzidakis — Vice President, Investor Relations and Corporate Communications

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. Joining me are Chip Brewer, our president and chief executive officer; and Brian Lynch, our chief financial officer and chief legal officer.

Earlier today, the company issued a press release announcing its third quarter financial results. We have also published an updated presentation. Both the earnings presentation and press release are available on the company’s investor relations website under the financial results tab. Please note that aside from revenue, all financial numbers reported and discussed today are non-GAAP measures.

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We identify non-GAAP measures in the presentation and reconcile them to corresponding GAAP measures according to Regulation G. Please be aware that this call will include forward-looking statements that may involve risks and uncertainties that could cause actual results to differ from management’s current expectations. We encourage you to review the safe harbor statements in the presentation and press release for a comprehensive description. I will now turn the call over to Chip Brewer.

Chip Brewer — President and Chief Executive Officer

Thank you, Katina, and good afternoon, everyone. I appreciate you joining our call today. I am pleased to report that our Q3 results exceeded our expectations in both legacy and Topgolf businesses.

First, looking at revenues, Topgolf’s same venue sales were largely in line with our expectations. In our legacy business, we saw benefits from product shipment timing moving into this quarter from Q4. Regarding EBITDA, the outperformance was mainly driven by operational efficiencies and cost management at Topgolf, along with shipment timing in our legacy business. We also encountered slightly favorable foreign exchange rates this quarter, although this trend shifted against us again early in Q4.

In the golf equipment sector, we are still leading the market, and 2024 is on track to be our third consecutive year holding the number one position in U.S. golf club market share. Additionally, we have maintained this top position in nine of the last ten years. Our investments in the ball category, including the launch of the new Chrome Tour brand, have driven impressive performance and record market shares.

Meanwhile, TravisMathew continues to gain market share through careful category expansion and distribution. However, both the golf equipment segment and TravisMathew experienced slightly slower market conditions than anticipated in Q3. Consequently, we are lowering our full-year revenue guidance by approximately $30 million to adjust for the reduced sell-through this period, a change distributed fairly evenly across our non-Topgolf businesses. Despite this, we view it as temporary fluctuations rather than a new trend.

Consumer activity has picked up since then, our brand positions remain solid, and we are confident in the long-term outlook for our core markets and products. Now, focusing on segment performance, Topgolf saw same venue sales consistent with expectations in Q3, down 11%. Sales for 1-2 bay venues decreased around 9%, while 3+ bay venues dropped about 19%.

The performance for 1-2 bay was affected quite evenly by traffic and spending during the quarter. For our full-year projection, we maintain our previous guidance for same-venue sales to decline by high single digits to low double digits.

Early October results were somewhat impacted by severe weather but showed recovery throughout the month. Overall, the month aligned with our implied projections for Q4 same-venue sales of down 10% to 15%. Furthermore, November and December bookings for 3+ bay events suggest an opportunity for improvements relative to recent trends.

If conditions unfold favorably, we could achieve the upper end of our annual guidance. Nonetheless, due to the observed volatility and potential adverse weather this season, we are maintaining our previous outlook. Looking ahead at same-venue sales, our team is committed to initiatives that aim to return the business to growth, including the recently launched Sonic the Hedgehog game, which taps into the excitement of a new movie debuting in December.

Innovative experiences and fresh attractions are crucial in driving long-term visitor traffic. We are enhancing our ability to introduce these features more frequently and effectively. Additionally, our efforts involve strengthening our consumer data platform to deliver targeted promotions for both returning and new visitors. We’re also rolling out new passes and bundles designed for frequent visitors.

Partnership programs are being expanded, and we’re enhancing our team with experts in performance marketing and loyalty strategies. We are committed to accelerating our growth in these areas and positioning ourselves for future success.

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Topgolf Sees Strong EBITDA Performance Amid Continued Venue Expansion

Strong Financial Outlook Despite Sales Challenges

Topgolf continues to show impressive EBITDA performance, even with significant sales challenges this year. The team expects to finish the year with an EBITDA margin almost 500 basis points higher than in 2019. This positive outcome, along with cost-saving initiatives, enables an upward revision of the EBITDA forecast for Topgolf, despite no changes for same-venue sales forecasts. The management is optimistic about future margin expansion as same-venue sales recover.

Ambitious Venue Expansion Plans

This year, Topgolf is on track to open seven new owned venues, six of which are newly constructed and one is an acquisition. Recently, two new venues opened in Greensboro, North Carolina, and Des Moines, Iowa, both showing promising performance. By the end of the year, Topgolf will have a total of 100 owned and operated venues.

Strong Growth in Golf Equipment Market

In the golf equipment sector, the overall market remains solid, with an increase in golf rounds played in the U.S. this year, building on previous years of growth. Although there has been a small decline in playable hours due to unfavorable weather, year-to-date performance remains stable. Datatech reported a sell-through decline of just over 4% for clubs in Q3; however, year-to-date results are flat, which is commendable given current economic conditions. Likewise, golf ball sales have shown resilience with overall flat performance in Q3 but an increase year-to-date.

Callaway Maintains Dominance in the Market

The Callaway Club brand consistently performs well, holding the No. 1 market share position in the U.S. for the past nine out of ten years. Particularly noteworthy is the success of the Ai Smoke line, which has led in drivers, fairway woods, hybrids, and irons. The Odyssey brand has also excelled, achieving dominance in putter categories that include a remarkable streak on major tours.

Golf Ball Market Share Hits Record High

Callaway’s U.S. golf ball market share reached a record 21.8% in Q3, an increase of 140 basis points from the previous year. Following a rebuilding process after a vendor’s plant fire over a year ago, operational improvements have allowed for increased capacity and quality in production. Research indicates that Callaway’s preferred ball ranking jumped from 16% to 21%, marking a significant achievement as this is the first time a brand other than Titleist exceeded the 20% threshold in tracking history.

Innovative Product Launches on the Horizon

Looking ahead, recent product launches, such as the Opus wedges and Apex Ai irons, demonstrate positive early results, promising potential for an uptick in market share in these categories. Additionally, Topgolf plans to unveil a new putter model, termed square-to-square, positioned in the rapidly growing zero torque category, expected to launch in December.

Active Lifestyle Segment Faces Headwinds

While revenues and earnings in the active lifestyle segment decreased, the decline aligns with expectations and masks underlying improvements across business areas. At TravisMathew, the brand outperforms a relatively soft market, achieving growth in core product lines and expanding into new categories while increasing owned retail stores to 57. The Jack Wolfskin brand continues to restructure in response to tough market conditions but shows promise for future recovery.

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Jack Wolfskin Improvement Signals Positive Future Amid Challenges

The progress in turnaround efforts at Jack Wolfskin is still underway, but there are promising signs for the mid- to long-term outlook. Recently, sales in Europe improved during late Q3 and early Q4, while China continues to show robust performance. By year’s end, a notably smaller cost base and a refined product strategy in Europe are expected.

In the active lifestyle sector, both Callaway and OGIO brands are doing well in the U.S. and Europe. However, in Japan, despite clothing and performance gear performing adequately in local currency, results drop when converted to U.S. dollars due to exchange rates. The company’s performance in Korea mirrors market trends, but there are signs of recovery ahead.

Overall, Q3 proved to be an operationally solid quarter. The legacy business shows a positive trajectory, focusing on enhancing strengths and directly addressing weaknesses.

At Topgolf, business trends remained consistent with previous patterns, particularly in venue profitability despite a slower top-line environment. Efforts are underway to improve long-term sales in existing venues. Management still believes that separating Topgolf from the legacy business could enhance shareholder value, with updates anticipated in future earnings calls.

Brian Lynch — Chief Financial Officer

Thank you, Chip, and good afternoon, everyone. As noted by Chip, we are satisfied with our third quarter results, given the broader economic situation. Our business units managed to execute well, benefitting from timing shifts in product shipments and some favorable currency movements, which helped us exceed our Q3 guidance.

As we look ahead, our segments are making strategic moves to secure their market positions while managing costs and liquidity. Key points from the quarter include:

• Q3 revenue and adjusted EBITDA performed better than anticipated.
• Cash flow from operations rose by $111 million, a 49% increase from the previous nine months.
• Consolidated inventory dropped by $70 million since Q3 last year.
• REIT-adjusted net debt declined by approximately $220 million, over 20% year-over-year.
• Available liquidity increased to $863 million, a $129 million rise from last year.

Looking at the specifics, Q3 consolidated revenues reached $1.013 billion, indicating a 3% year-over-year decline. This decrease resulted largely from an 11% dip in active lifestyle revenue, mainly attributed to declining sales in Jack Wolfskin as European wholesale apparel conditions remain weak.

Adjusted EBITDA for Q3 was $120 million, down 27% from last year; causes for this drop will be elaborated in segment performance discussions. Speaking of segment performance, Topgolf’s revenue grew 1% to $453 million, driven by the success of new venues. However, this was offset slightly by an 11% decrease in established venue sales.

Operating income for Topgolf fell to $28 million, down $11 million due to increased depreciation related to new venues and lower sales in existing locations. Meanwhile, Topgolf-adjusted EBITDA declined 7% year-on-year to $84 million, although EBITDA margins remained strong despite the downturn in same-venue sales.

In the golf equipment segment, quarterly revenue remained steady at $294 million, fueled by this year’s new clubs and balls, with older product sales reducing as inventory levels stabilize. Operating income for this segment came to $27 million, down $8 million primarily due to rising freight expenses.

In our active lifestyle segment, the revenue drop of 11% year-over-year was driven by the ongoing struggles of Jack Wolfskin in the European market, despite its growth in China. Consequently, operating income fell to $21 million from $40 million last year due to lower sales and higher freight costs.

Examining our balance sheet and liquidity, available resources grew by $129 million to $863 million year-over-year, reflecting better cash generation and efficient working capital management. As of September 30, our total net debt stood at $2.3 billion. This figure excludes approximately $258 million in convertible debt and slightly increased from $2.1 billion last year due to new venue financing costs, mitigated by lower term loan balances.

For evaluation, we exclude REIT debt linked to Topgolf venue financing. Our REIT-adjusted net debt is $841 million, a significant decrease compared to last year, and net debt leverage rose to 4.1 times, up from 3.8 times, primarily due to increased venue debt.

Critically, the REIT-adjusted debt leverage ratio, which takes into account REIT interest expenses aligned with rent, decreased to 1.8 times from 2.1 times year-over-year, affirming our comfort with these leverage levels. Regarding new venues, we are on track to open seven this year, including one being converted from the BigShots acquisition. For 2025, our aim is to launch about five new venues.

Our inventory levels decreased by $70 million, or 10%, totaling approximately $667 million at Q3’s end. This is satisfactory, and we anticipate that year-end levels may vary based on the timing of receiving 2025 products. Gross capital expenditures for the first nine months of 2024 reached $227 million, with $88 million reimbursed from financing partners, resulting in a net expenditure of about $139 million.

Looking forward, we are adjusting our forecast for free cash flow in line with changes in our EBITDA expectations.

Company Adjusts 2024 Financial Outlook Amid Mixed Consumer Activity

Free Cash Flow and Capital Expenditure Insights

The company expects free cash flow of about $115 million, a decrease from the previous expectation of $130 million. This update considers potential fluctuations in inventory timing, which could impact cash flow. Regarding capital expenditures, the annual estimate remains at approximately $190 million: $60 million from the non-Topgolf business and $130 million primarily from Topgolf.

Revenue and EBITDA Projections Revised

For fiscal year 2024, the revenue guidance has been lowered to around $4.2 billion, marking a decrease of $30 million, less than 1% from the previous midpoint due to disappointing consumer activity in Q3. This decline affects sales during that period and consequently impacts reorders for Q4. Fortunately, consumer engagement has recently improved, suggesting that Q3’s downturn may merely reflect temporary volatility. As a result, the EBITDA guidance is lowered by $15 million to a range of $560 million to $570 million.

Topgolf Performance and Outlook

At Topgolf, revenue expectations remain steady at about $1.79 billion, and adjusted EBITDA is slightly up by $5 million to $315 million, driven by solid venue margins and effective cost management. For Q4, the forecast is adjusted to anticipate approximately $885 million in revenue and adjusted EBITDA between $74 million to $84 million. Comparatively, last year’s Q4 figures stood at $897 million in revenue and $70 million in EBITDA. The increase in adjusted EBITDA is attributed to anticipated improvement in gross margins from the golf equipment sector.

Q4 Topgolf Expectations

In Q4, Topgolf likely faces a revenue drop in the mid-single digits compared to last year, influenced by expected decreases in same-venue sales, which Chip previously discussed. Adjusted EBITDA is projected to decline by about $12 million year-over-year, though operational efficiencies may help mitigate some losses. Overall, while Q3 presented challenges, interest in golf remains robust, underscoring the company’s strength in golf equipment and entertainment markets.

Commitment to Operational Efficiency and Growth

The company’s team has demonstrated remarkable cost management, particularly at Topgolf, which saw an improved EBITDA outlook despite holding firm on revenue projections. The company remains in a strong financial position, with a solid balance sheet, reduced REIT-adjusted net debt leverage, adequate inventory, and ample liquidity. Importantly, both the total company and Topgolf are projected to generate positive free cash flow this year. Now, let’s open the floor for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Matthew Boss with JPMorgan. Please go ahead.

Matthew Boss — Analyst

Thank you. Chip, could you elaborate on the recent traffic compared to average spending at Topgolf? Are there any noteworthy trends in the consumer versus event segments? Looking ahead to 2025, how would you prioritize initiatives to bolster same-venue sales?

Chip Brewer — President and Chief Executive Officer

Absolutely. Recent Topgolf trends show a balanced impact on spend per visit and traffic, with a 9% decline evenly split between these two elements.

We have observed more inconsistency within the events side of the business compared to consumer traffic, continuing a pattern from the previous quarter. On a positive note, we anticipate favorable trends for 3+ bay events moving forward. To improve same-venue sales, we are implementing several initiatives, including digital enhancements, selective promotions, and launching a consumer data platform—all vital for our strategy.

Strengthening our leadership team is also key. Long-term, enhancing the overall experience and reasons for guests to visit Topgolf will be crucial. Initiatives like our new game “Block Party,” the launch of “The Sure Thing” golf club earlier this year, and the upcoming “Sonic the Hedgehog” game are designed to create excitement and encourage repeat visits.

Matthew Boss — Analyst

Following up on golf equipment, can you discuss the improvement in sell-through trends in Q4 compared to the softer activity in Q3?

Chip Brewer — President and Chief Executive Officer

Certainly, the golf equipment sector remains strong. Rounds played have reached record levels, with increasing participation. While there was a 4% decline in the U.S. club business in Q3, it had previously shown stable or slight growth, reflecting typical market volatility. Positive sell-through trends returned in September and October, highlighting the market’s overall health.

Matthew Boss — Analyst

Thank you for the insight. Best of luck moving forward.

Chip Brewer — President and Chief Executive Officer

Thanks, Matt.

Operator

The next question will come from Michael Swartz with Truist Securities. Please go ahead.

Mike Swartz — Truist Securities — Analyst

Hey, good afternoon.

Topgolf Sales Show Mixed Results Amidst Weather Concerns

Quarterly Overview of Performance

During the recent earnings call, Topgolf’s President and CEO, Chip Brewer, reported a decline in same-venue sales, which were down about 11%. This trend mirrors the challenges highlighted in July’s conference call. Brewer noted some fluctuations in performance throughout the quarter, with August showing slight improvements while September experienced steeper declines. The overall performance was affected by external factors such as storms, particularly towards the end of the quarter.

Impact of Weather and Future Challenges

The quarter was somewhat turbulent due to weather conditions. Brewer acknowledged that October saw more hurricane-related impact compared to September. Historically, this time of year tends to bring such weather disruptions. Looking ahead, December presents a significant challenge as year-over-year comparisons will be tough, especially since the last two weeks of December last year were exceptionally warm. The company anticipates that unless similar conditions arise, December will likely underperform compared to past metrics. Brewer expressed hope for favorable weather but cautioned that the usual patterns suggest a challenging comparison ahead.

Timing of Product Launches and Shipments

Analyst Mike Swartz from Truist Securities raised a question regarding the timing of product launches and its influence on quarterly results. CFO Brian Lynch responded, clarifying that the majority of their financial performance was affected by shipment timings that shifted from Q4 to Q3. This timing discrepancy played a crucial role in meeting their earnings expectations.

Guidance for Fourth Quarter

Joe Altobello from Raymond James inquired about the company’s guidance for same-venue sales in Q4, set at a range of 10% to 15% down. Brewer explained that this broad range accounts for potential weather impacts, especially in December, which is pivotal for event-driven revenue. As weather patterns can greatly affect business, the company remains cautious but optimistic.

Strategic Separation Plan for Topgolf

Continuing on the discussion of Topgolf’s future, Altobello questioned the company’s plans for a spin-off. Brewer confirmed that the company is actively exploring separation options for Topgolf, aiming to maximize shareholder value. If the spin-off goes forward, they anticipate targeting a mid-next-year timeline.

Traffic Trends and Consumer Behavior

Eric Wold from B. Riley Securities posed questions regarding shifts in traffic patterns. Brewer indicated that while there had been minor changes, traffic and spending per visit are currently balanced. This contrasts with earlier trends that indicated a heavier reliance on traffic increases. There are no expected changes in the type of events, and the outlook appears stable as the holiday season approaches.

Future Venue Openings and Strategy

Wold also asked about planned openings for new Topgolf venues. Brewer confirmed approximately five openings are projected for the upcoming year. The company continuously adapts their venue plans in response to market conditions, ensuring the likelihood of positive cash flow remains high while maintaining an excellent pipeline of venues.

Long-term Performance Outlook

Megan Clapp from Morgan Stanley wrapped up the inquiries by probing deeper into the sales performance over several years. Despite the recent declines, Brewer reiterated that the company’s results continue to align with their expectations, though multi-year comparisons show significant deterioration. The company is committed to addressing these challenges while striving toward future improvements as conditions evolve.

Topgolf’s Q3 Performance: Navigating a Tough Market

Chip Brewer — President and Chief Executive Officer

The question of whether the challenges Topgolf faced in the third quarter stem from broader economic issues or internal factors is significant. In the previous quarters, we discussed an evident decline, but understanding the reasons behind it is crucial now.

Assessing the Challenges

Chip Brewer — President and Chief Executive Officer

Our results indicate that the largest decline happened in the 3+ bay events, which fell 36% over a two-year period. In detail, the drop was 9% in Q2 and 19% in Q3, reflecting considerable volatility in this category. This can largely be attributed to two factors: a return to normalcy following a surge in post-COVID interest and the onset of an economic slowdown affecting consumer discretionary spending. While consumer spending has shown a steady decline, with an 8% drop in Q2 and a 9% drop in Q3, I do not observe any drastic changes in this area. Instead, it seems that we are witnessing ongoing pressure on consumers, which is impacting Topgolf as well.

Looking Ahead

Megan Alexander Clapp — Analyst

Given the total company performance, looking at 2024 versus 2019 reveals flat growth in Q2 and a 4% decrease in Q3. With the holiday season approaching, I’m curious if there are signs that demand is stabilizing.

Chip Brewer — President and Chief Executive Officer

At this stage, it’s premature to assess how demand might trend into 2025. Although we believe we’ll see positive same-venue sales in the long run, I cannot specifically predict when that recovery will happen. There have been some signs of improvement with our bookings in the 3+ bay events, but again, I can’t provide direct forecasts for next year.

Addressing Promotional Efforts

Casey Alexander — Analyst

Shifting focus to the promotional efforts initiated in the second and third quarters, could you clarify how that has affected performance in the one- and two-bay areas compared to the corporate sector?

Chip Brewer — President and Chief Executive Officer

Our promotional campaigns have primarily targeted consumers, like the Free 30 promotion. We’re honing our approach by using consumer data to reach both new and lapsed visitors. This shift is expected to improve the returns on our digital marketing efforts. As for corporate events, we’re enhancing our sales management and introducing specific promotions. However, broader corporate restrictions can limit our promotional effectiveness regardless of discounts. Our focus will be on implementing targeted promotions that will yield better results.

2024 Financial Outlook

Casey Alexander — Analyst

Regarding Slide 11, which indicates an expectation of $70 million in adjusted free cash flow for Topgolf in 2024, how do the reduced venue openings planned for 2025 affect this outlook?

Chip Brewer — President and Chief Executive Officer

The adjustments related to the planned openings for 2025 will be factored into our 2024 outlook, but the full implications will be clearer once we assess where we stand as the year progresses.

Casey Alexander — Analyst

Thank you, Chip.

Chip Brewer — President and Chief Executive Officer

Thank you.

Operator

The next question will come from Casey Alexander with Compass Point Research and trading. Please go ahead.

Topgolf’s Cash Flow Projections Raise Questions for 2025

Financial Outlook and Strategic Direction Discussed

Chip Brewer — President and Chief Executive Officer

We forecast 70 million in adjusted free cash flow. So, if we slow down venue construction, could this improve our numbers for 2025?

Casey Alexander — Analyst

That’s correct.

Chip Brewer — President and Chief Executive Officer

Brian, do you want to elaborate?

Brian Lynch — Chief Financial Officer

At this stage, we aren’t providing guidance for 2025, Casey. However, I can mention that we expect some challenges next year. One factor is that we will be adjusting incentive compensation accruals back to target levels. Additionally, current foreign exchange rates could present a hurdle. We’ll give a clearer update on both these points, as well as free cash flow at our next earnings call.

Chip Brewer — President and Chief Executive Officer

You’re correct —

Casey Alexander — Analyst

Thank you. Please continue.

Chip Brewer — President and Chief Executive Officer

Building fewer venues will positively influence cash flow in 2025.

Casey Alexander — Analyst

Understood. Brian, many analysts likely already have a 2025 model up and running, so I appreciate your insight.

Brian Lynch — Chief Financial Officer

You’re welcome.

Chip Brewer — President and Chief Executive Officer

Thanks again.

Operator

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 proceed.

Chip Brewer — President and Chief Executive Officer

Thank you all for joining us today. We appreciate your time, and we look forward to updating you again in February. Enjoy the holiday season.

Operator

The conference has concluded. Thank you for attending today’s presentation. [Operator signoff]

Duration: 0 minutes

Call Participants

Katina Metzidakis — Vice President, Investor Relations and Corporate Communications

Chip Brewer — President and Chief Executive Officer

Brian Lynch — Chief Financial Officer

Matthew Boss — Analyst

Mike Swartz — Truist Securities — Analyst

Joe Altobello — Analyst

Eric Wold — Analyst

Megan Alexander Clapp — Analyst

Casey Alexander — Analyst

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