Yahoo Finance Topgolf Callaway Brands Corp. (NYSE:MODG) Q1 2024 Earnings Call Transcript
Topgolf Callaway Brands Corp. (NYSE:MODG) Q1 2024 Earnings Call Transcript May 8, 2024
Topgolf Callaway Brands Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and welcome to Topgolf Callaway Brands' First Quarter of 2024 Earnings Conference Call. Please note that today's event is being recorded and all participants will be in a listen-only mode during the call. [Operator instructions] And with that, I would like to now turn the call over to Katina Metzidakis, Vice President of Investor Relations and Corporate Communications. Please go ahead.
Katina Metzidakis: Thank you, operator and good afternoon, everyone. Welcome to Topgolf Callaway Brands' first quarter earnings conference call. I'm Katina Metzidakis, the company's Vice President of Investor Relations and Corporate Communications. Joining me speakers on today's call are Chip Brewer, our President and Chief Executive Officer, and Brian Lynch, our Chief Financial Officer and Chief Legal Officer. Earlier today, the company issued a press release announcing its first 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. Most of the financial numbers reported and discussed on today's call are based on US Generally Accepted Accounting Principles.
In the instances where we report non-GAAP measures, we identify the non-GAAP measures in the presentation and reconcile the measures to the corresponding GAAP measures in accordance with Regulation G. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the safe harbor statements contained in the presentation and the press release for a more complete description. And with that, I would now like to turn the call over to Mr. Chip Brewer.
Chip Brewer: Thank you, Katina and good afternoon, everyone. We appreciate everyone joining our call. I'm pleased to report strong Q1 results, continued brand strength across our portfolio and improving operating efficiencies that are driving high confidence in a full year EBITDA forecast and higher estimates for both EPS and cash flow. Focusing on Q1, our revenue of $1.14 billion was in line with guidance, as was Topgolf's same venue sales performance. As expected, we also gained market share in golf equipment based on compelling product launches in both clubs and balls. This on track revenue performance combined with stronger than anticipated operating efficiencies, some favorable timing of expenses and currency hedge gains, delivering better than expected EBITDA of $161 million and EPS of $0.09 in the quarter.
We also delivered better than anticipated cash flow. As we look towards the full year, we are lowering our full year revenue expectations by $80 million, a little under 2% of full year expected revenues due to an approximate $45 million reduction in expected Jack Wolfskin revenues due to challenging market conditions in its European business, as well as an additional currency headwind since our last call of approximately $35 million. Even with this revenue change, we remain confident in our overall full year EBITDA forecast based on our currency hedging programs, improving operating margins at both our venues and our golf equipment business, as well as confidence in our core brands and market conditions. We are also increasing our full year EPS by $0.05 per share and raising our free cash flow and embedded free cash flow estimates by approximately $60 million and $40 million respectively.
In short, we remain on track for our organic revenue growth targets in our key brands, our overall EBITDA growth targets, and we are ahead of schedule in delivering operating efficiencies, cash flow and EPS, as well as now beginning the process of paying down term debt. As I see it, the fundamental engine of our business continues to strengthen. Moving to our business segment performance, Topgolf continues to make strides on our three key performance drivers, same venue sales growth, venue margin and returns, and new venue development. As I will walk you through in a moment, we have multiple initiatives in place to lay the foundation for durable growth, attractive venue returns and the expansion of our footprint, all of which are highly complementary to the product side of our business.
First, Q1 same venue sales of down 7% was in line with our expectations. As a reminder, Q1 was impacted by a post-COVID surge in our corporate events business in early 2023, as well as extreme cold weather during January of this year, which we highlighted during our February earnings call. Our Q1 same venue sales stabilized after the January weather normalized. As we drive towards positive same venue sales growth, we are executing against three key areas of opportunity, digital experience and value. Digital is the most rapidly developing opportunity for us to drive sales at Topgolf, and I'm pleased that our digital revenue penetration in Q1 increased to 35% versus 33% from the same period last year, and the percentage of visitors that come through digital channels is now 62%, up 710 basis points year-over-year.
Our new and evolving digital and commercial teams are getting smarter every day, unlocking key insights and driving results. Building on this, I'm pleased to report that our cross brand consumer data platform is now live ahead of schedule, and we expect this will greatly improve our ability to gather player insights, tailor more compelling products and offerings and importantly, serve as the backbone necessary for a Topgolf Callaway brand loyalty program slated to be in trial mode at Topgolf by the end of this year. Our second area of opportunity to drive same venue sales is experience. We are continuing to uncover new ways to improve the player experience and offer more curated products. Towards this end, during Q1, we introduced Block Party! our first new Topgolf game since Angry Birds, which launched back in 2021.
One of the great aspects of this new game is that it's fun for all player skill levels, as you score points by hitting the ball literally anywhere in the outfield. Player response has been extremely positive so far and we intend to invest in media to support greater awareness as we enter our peak summer months. On the synergy front, we held Callaway Club fitting events in venues across the country during the week of the Masters. We also implemented the Callaway Club Upgrade program, which allows players to upgrade their Topgolf gaming experience by upgrading to our latest Callaway clubs in all venues and all venues now sell and promote our new Chrome Tour Golf Ball as well as Callaway seasonal decorated golf ball offerings. Our goal is to ensure that the Callaway brand is top of mind for the on course golfers that visit Topgolf every day, a number we believe is approximately 40% of all US golfers annually, as well as the new beginner golfers that Topgolf is creating.
Value is our third sales growth opportunity. As you are aware, we launched an In App only half-off gameplay promo on Mondays and Wednesdays in Q1 and also promoted our half-off Tuesdays. We've been pleased with the results, but perhaps more importantly, this offering was a first step towards a broader strategy to build a compelling portfolio of value offerings for our players. Looking ahead, Topgolf's commercial and digital team will continue to test and learn what works best, and our new consumer data platform will make it easier for them to gain insights as well as take action. To this end, this summer's primary value offering will be our new free 30 [ph] Campaign, which offers players 30 free additional minutes of gameplay when they book a bet online during specified hours on weekdays.
The booking requires a small reservation fee consistent with our other reservation products. We believe this will increase what we know are more valuable digital consumers, and based on trial results to date, this offering is expected to be more effectively drive visits. With the help of our new consumer data platform, we will also be experimenting with passes and bundled offers to drive repeat visits within 60 days to 90 days of an initial visit. It's worth mentioning that you can count on us to communicate these programs in a thoughtful manner, so that they increase both our bottom line as well as our top line, and this communication will increasingly be digital, personalized and affected. Looking forward for Q2, we are forecasting same venue sales to be down low single digits, a nice improvement from Q1.
This takes into account a slower than expected first three weeks of April as we, like many other companies, struggled with slow sales associated with year-over-year, spring break and Easter timing. As we have moved past this period, over the past two weeks, sales trends have returned to more normalized and expected levels. However, we are now slightly behind our full year targets and given the choppy market conditions we have seen and could continue to see, we are widening our full year same venue sales guidance from approximately flat to a new range of slightly positive to down low single digits. Most importantly, we have confidence in same venue sales improving in the second half of the year as our biggest marketing, spend and consumer programs go live starting Memorial Day and compares versus last year become easier.
And to be clear, our internal goal is for us to transition back to positive same venue sales in the second half of this year. The teams have been working hard for this and now that the unusual laps are behind us, they believe they will start to deliver improved results. I for one, [ph] am confident in their direction and remain convinced that we'll be able to grow same venue sales low single digits or better over the long term. Shifting to margin expansion, in Q1, we again saw strong margin performance, including 180 basis point year-over-year increase in our venue level EBITDA margin. We continue to benefit from our pie inventory management system and new labor model, which have both now been rolled out system wide and are delivering clear results.
In addition to the efficiency gains, our Q1 margin also benefited from a shift in timing of our marketing spend to focus more on post Memorial Day programs and products. We continue to feel confident in and are consistently proving our ability to drive venue operating margins over the long term and in all kinds of market conditions. With this, we remain on track to hit our 35% EBITDA margin target for the full year. Furthermore, as the profitability of our venues continue to increase and same venue sales transitions back to growth, our already attractive venue returns will become even stronger than they are today. This positions us extremely well as we continue to grow our footprint against a backdrop of significant white space. Speaking of white space and our new venue's growth opportunity, in January we purchased a big shots venue in Bryan, Texas.
In April, we opened a new venue in Durham, North Carolina, and just last week we opened in Montebello, California. The Montebello venue is our most densely populated trade area and represents our second public private partnership. It's quite unique in that it is adjacent to two municipally owned greengrass golf courses, one a traditional nine hole course and the second a new par three nine hole course with night lighting. While we don't own or operate these courses, we believe they will be synergistic with our venue in driving interest and excitement. We are now 92 owned and operated venues in the US, four internationally owned venues and over 100 globally, when you include franchisees, a testament to the strength of the business and strong execution by our world class real estate team.
Today, we are also updating our venue opening expectations for 2024 due to a delay in permitting, which will push a venue plan for New Braunfels, Texas, that we expect it to open in late Q4 into 2025. We now expect to add seven venues in 2024 versus the eight previously communicated, a change that should be largely immaterial to both our 2024 and long term financial outlook. Looking ahead, excluding this year where we intentionally pulled back to accelerate cash flow, we remain confident in our ability to average 10 new venues per year over the foreseeable future. We also remain confident in our TAM of 250 venues in the United States with a similar number available internationally. Turning to golf equipment, I'm pleased to report the Callaway brand continues to shine.
In Q1, thanks to the incredible work from our teams across R&D supply chain, sales, marketing and corporate, we gained share year-over-year in both golf ball and clubs. In Q1, Callaway held its position as the number one US market share brand and driver, fairy woods and hybrid, and focusing on our latest club launch Ai Smoke Woods achieved the number one US model market share position in driver, fairy woods and irons. In Q1, we also gained the number one US dollar market share position in Potter, a position we have not enjoyed for some time and a testament to the strength of our Ai-ONE Putter launch. Golf Ball has also shown nice growth, especially in the premium or tour category where Callaway achieved a new record US market share of 11% and also delivered an overall share of 19.3%, up 120 basis points year-over-year.
That said, the strong feedback we received on the new Chrome Tour product performance gives us conviction that we have further room to grow and hopefully more record market shares to report in the future. We're going to be driving this with strong advertising as well as field activation via our Chrome tour speed and spin challenges. I'm very pleased with the performance of our new launches and we'll look forward to providing more color on the sell through performance on our next earnings call. In other categories, we continue to see strong package set sales, which leads us to believe that the positive momentum we have seen over the last several years with new entrants into the game of golf continues. And finally, I'd also like to highlight that in Q1, we saw record 16% share in Golf Glove, leveraging our brand and distribution strength.
Looking at the golf equipment business by geography, the US market and our business both remain strong, with field inventories and consumer demand both in line with expectations. The European market started the year a little slower than expected due to poor weather conditions in the UK, but we gained share and appear well positioned to continue to do so. The Japan market overalls up slightly on a constant currency basis, but our business in Q1 was down in real terms due to the currency trends as well as lower sell in volumes this year versus last year as retailers are being more conservative. And lastly, the Korean market has been tough thus far in 2024 with sales down double digits as well as currency headwinds. As we look towards the balance of the year, it's worth mentioning that we have both more and larger product launches planned for the second half of this year than we had in 2023, and thus our growth will be more second half weighted.
This was always part of our plan and consistent with similar fall launches and product cadences that we've done in previous years. We remain on track to grow the golf equipment segment for the full year, and we continue to feel good about the overall health of golf globally. Turning to our active lifestyle segment, as expected and communicated on our last call, active lifestyle was the one segment that was down year-over-year in Q1. It is also now expected to be down for the full year. We are pleased with our Q1 performance at Travis Matthew, which was in line with expectations, but as expected, down versus Q1 last year. As a reminder, as mentioned during our February call, we lapped a corporate channel sell in that occurred primarily in Q1 last year and was significant relative to the size of this brand.
Excluding this impact, underlying sales trends remain healthy and growing. We also remain on track to open approximately 10 stores this year, with seven leases already signed. Travis Matthew also celebrated the one year anniversary of our women's launch and we remain confident in our ability to continue to grow that business. We're also pleased with the relaunch of our shoe business under the Travis Matthew brand. Finally, Jack Wolfskin remained under pressure in Q1, largely due to a tough macro environment, including an over inventory channel and soft overall market conditions in Europe. As a result, we are lowering our full year revenue expectations for this brand. However, I think it's worth noting that despite this market pressure, we still expect positive EBITDA growth and performance in 2024.
We also continue to be pleased with the brand's performance in China. Looking forward, we're certainly not accepting of the status quo. Earlier this year, we transitioned to a new European leadership team, which has been proactively taking action to stabilize this business, return it to profitability and drive future growth. There has been considerable progress already made, with more to come in the next few months. Although this business is a relatively small portion of our annual revenues and an even smaller portion of our annual profit, we will update you further on these actions and our progress during our Q2 call. In closing, I'd like to thank the Topgolf Callaway brands teams for their hard work and solid execution. Overall, we feel good about our start to 2024 and the strength of our core brands and markets.
We remain confident in our EBITDA targets for this year and are taking up our cash flow and EPS targets as well as starting the process of paying down debt. Perhaps most importantly, we believe the fundamental engine of our company is continuing to strengthen and we feel great about our long term direction and opportunity. With that, I'll turn the call over to
Brian Lynch: Thank you, Chip and good afternoon, everyone. As Chip mentioned, despite some unfavorable foreign currency rates and some revenue softness in our Jack Wolfskin business, we had a strong start to the year overall. We had better than expected adjusted EBITDA and EPS on in line revenue, our cash used in operations improved by $79 million compared to Q1 last year, our 2024 golf equipment product launches, including Ai Smoke Woods and irons and the Chrome Tour Golf Balls, were well received at all levels and grew market share. Our inventory reduction initiatives were successful with our consolidated inventory decreasing $227 million since Q1 last year. We successfully repriced our term loan B, reducing our interest rate by 60 basis points and saving approximately $7 million on an annualized basis based on current debt levels.
We also repurchased an additional one million shares of our common stock since our last earnings call, and today we announced plans to pay down $50 million of the term loan debt at the end of May. All in all, a very good quarter in what appears to still be a choppy consumer environment. I mentioned during our last call that 2024 will be an investment year and I want to provide a little color on what we have accomplished year to date. I am pleased to announce that in March, we successfully transitioned to our new workday enterprise management system across most of our business globally. This will improve access to and management of human capital data, which has become extremely important post-merger, now that we have over 30,000 employees and it will also enhance our training, career development and recruitment processes.
Separately, in early April we launched our consumer data platform. The CDP will enable us to better understand consumer behaviour, preferences and trends across our brands. We will leverage these insights to drive more impactful personalized strategy and engagements with our consumers. I want to recognize and thank our teams for their hard work bringing this to life. Now, turning to our first quarter results, consolidated revenues decreased 2% year-over-year to $1.144 billion, which was in line with our Q1 guidance range. This decrease is attributable to a 15% year-over-year decrease in our active lifestyle business. As mentioned last quarter, we had to lap an approximate $35 million corporate channel inventory fill in that occurred in the first half of 2023 and our Travis Matthew business that did not repeat in 2024.
Most of this impact was in Q1. These results were partially offset by the 5% year-over-year growth at Topgolf and 1% year-over-year growth in golf equipment. Currencies negatively impacted consolidated revenue by approximately $8 million, most of which impacted the golf equipment segment, which grew 3% on a constant currency basis. Non-GAAP first quarter net income decreased approximately $17 million compared to last year, largely due to increased D&A and interest expense, related to new Topgolf venue development. Adjusted EBITDA of $161 million increased 2% compared to last year and exceeded the high end of our guidance range due to strong venue margins at Topgolf, timing of OpEx, which shifted into the balance of the year and some incremental FX gains.
Moving to segment performance, at Topgolf, Q1 revenue grew 5%, driven primarily by new venues, partially offset by a 7% decline in same venue sales, which was in line with expectations given the post-COVID surge in the corporate events business in Q1 2023 as Chip mentioned earlier. Topgolf operating income was $3 million in the first quarter, up slightly compared to the prior year, while adjusted EBITDA increased $12 million to $60 million. The adjusted EBITDA improvement was driven primarily by the continued improvement in venue execution and margin as well as increased revenue. Venues continued to benefit from pie as well as the new labor model, which has now been rolled out system wide. Topgolf margins in Q1 also benefited from a shift in the timing of marketing spend to be more weighted toward the summer to support our exciting summer programs.
We have confidence in same venue sales improving in the second half of the year, given the upcoming marketing and consumer programs Chip mentioned and as the most challenging same menu sales comps in 2023 are now behind us. Our internal goal is to transition back to positive same venue sales during the second half of the year. Moving to Q1 results for golf equipment; revenue increased 1% year-over-year to $450 million, primarily due to strong momentum from our recent club and ball launches, partially offset by unfavourable changes in foreign currency rates and softness in Asia. Importantly, our core US golf equipment business revenue grew high single digits. Golf equipment operating income of $82 million increased 1% year-over-year due to the increased revenue.
Interactive lifestyle segment, Q1 revenue decreased 15% year-over-year, primarily due to lapping the corporate channel fill in at Travis Matthew that I mentioned earlier. In addition, our Jack Wolfskin business, which represents less than 10% of our total sales, is facing challenging market conditions in Europe, including high retail inventory levels and overall soft market conditions. As a result, we expect that business to be down for the full year. As Chip mentioned, we have a new management team and we are actively working to optimize that business. Operating income decreased to $25 million compared to $37 million in the prior year. This decrease was driven by the lower sales. Turning to the balance sheet, I'd like to highlight the term debt repricing we successfully completed in March, which lowered the interest rate on our term loan B by 60 basis points and resulted in annualized interest savings of $7 million based on current principal levels.
In addition, since our last earnings call, we've repurchased one million shares in open market transactions for a total cost of $16 million. We also continue to have ample liquidity, which is comprised of cash on hand and borrowing capacity under our credit facilities. As of March 31, 2024, our available liquidity increased $94 million to $720 million compared to the prior year due to better cash flow generation as the company continues to manage costs and more efficiently manage working capital, especially with regards to inventory. Given our strengthened cash flow outlook and strong liquidity position, we now plan to pay down $50 million of the principal amount of our term loan debt at the end of the month. At quarter end, we had total net debt of $2.4 billion, which excludes convertible debt of approximately $258 million compared to $2.2 billion in Q1 2023.
This increase is attributable to increased venue financing debt related to new venues. As a reminder, we think it is also helpful to evaluate our net leverage position by excluding the venue financing REIT debt, which is akin to capitalized rent with no additional principal or bullet repayment required. Excluding the REIT debt, our REIT adjusted net debt is $1.1 billion compared to $1.3 billion as of Q1 2023. Our net debt leverage, which excludes convertible debt, was 4.0 times at March 31, 2024, compared to 4.1 times in the prior year. This change was driven by increased EBITDA and improved cash flow, which more than offset the increased venue financing debt. Our REIT adjusted net debt leverage ratio is 2.2 times compared to 2.5 times in the prior year.
We feel very comfortable at these leverage levels. Our inventory balance decreased $227 million, or 24% from $930 million as of Q1 2023 to $703 million at the end of Q1 2024, a significant achievement by our teams who have worked diligently to manage inventory to more reasonable levels after a post-COVID surge. We feel good about our current level and overall quality of our inventory. Capital expenditures for the first three months of 2024 were $65 million and we received reimbursements of $27 million from our REIT arrangements for net capital expenditures of $38 million, of which $28 million is related to Topgolf. Now turning to our balance of year outlook, as mentioned earlier, given the unfavorable change in FX rates and the softness in the Jack Wolfskin Europe business, we are lowering our full year 2024 revenue guidance range by $80 million to a range of $4.435 billion to $4.475 billion.
Approximately $35 million of this decrease is attributable to FX and the other $45 million to Jack Wolfskin. Despite the drop in revenue guidance, we remain confident in our adjusted EBITDA guidance given the strength of our core business and FX hedging program. As a result, we are reiterating our full year adjusted EBITDA guidance of $620 million to $640 million. By segment at Topgolf, we continue to guide to approximately $1.96 billion in revenue and approximately $350 million in adjusted EBITDA, which is unchanged from prior guidance. As Chip mentioned, we are slightly adjusting our Topgolf same value sales sales growth expectations to a range of slightly up to down low single digits, which includes an anticipated improvement in trends in the second half of the year, as our summer initiatives take hold, and also as year-over-year comparisons become easier.
In golf equipment, even after taking into account the increased FX headwinds, we expect to grow revenue in this segment this year, given the strength of our product line and incremental second half launches. It is important to highlight that overall, our new product launches will be more weighted towards the back half of 2024 versus last year, when new launches were more Q2 weighted. We also continue to expect profits to be up in this segment for the year. In active lifestyle, given unfavorable FX rates and the softness in the Jack Wolfskin business, we expect revenue and operating income to be down year-over-year in this segment. As a result of the repricing of our term loan. B, anticipated debt paydown and higher cash flow outlook, we are raising our full year EPS guidance range by $0.05 to $0.31 to $0.39.
Our debt repricing will provide approximately $2.5 cents [ph] benefit in 2024. The $50 million expected pay down in debt should also provide approximately $0.01 benefit this year and the balance is related to higher expected income when investing in increased cash flow. Shifting gears, as compared to prior guidance, free cash flow is expected to improve by approximately $60 million due to working capital improvements, lower cash interest and a shift in timing of growth CapEx to next year. We are also forecasting better than expected EBITDA free cash flow, excuse me, embedded free cash flow versus prior guidance due to working capital improvements in our golf equipment and active lifestyle segments. As a result, free cash flow and embedded free cash flow are expected to be approximately $165 million and $265 million respectively, which represents a $60 million and $40 million improvement versus prior guidance, respectively.
We expect total net CapEx to be $20 million lower than our previous guidance of $200 million due to timing of Topgolf growth CapEx mentioned above. Now turning to Q2, specifically, in Q2, we expect consolidated revenue of $1.18 billion to $1.20 billion versus $1.18 billion in Q2 2023, or in other words, flat to up slightly. We estimate adjusted EBITDA to be in the range of $191 million to $201 million compared to $206 million in the prior year. In Q2 at Topgolf, we expect to be up in revenue and operating income year-over-year due to the new venues since Q2 last year. In Q2 Goff equipment, we are being impacted by the shift in timing of launches from Q2 last year to the second half of 2024. In Q2 last year, we launched our Big Bertha Woods and Irons, which is an approximate $30 million impact compared to Q2 this year.
As a result, we expect this segment to be down in revenue and operating income year-over-year for the second quarter, but as previously mentioned, up for the full year. In Q2, an active lifestyle, we expect to be down in revenue year-over-year as Travis Matthew will be lapping the remaining portion of the corporate channel fill in and separately, market conditions in Europe and our Jack Wilson business are expected to remain soft in Q2. As a result, we would expect to be down in operating income as well in this segment. Overall, we are pleased with our start to the year and confident in the strength of our core business. As a result, we feel comfortable committing to paying down the $50 million of term loan debt. We are optimistic for the balance of the year.
We will now open the call for questions. Operator, over to you.
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