Good afternoon, and welcome to the Topgolf Callaway Brands’ First Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Katina Metzidakis, Vice President, Investor Relations. Please go ahead.

Good afternoon, and welcome to Topgolf Callaway Brands First Quarter Earnings Conference Call. I'm Katina Metzidakis, Vice President of Investor Relations and Corporate Communications. Joining me on today's call are Chip Brewer, our President and Chief Executive Officer; Brian Lynch, our Chief Financial Officer and Chief Legal Officer; and Artie Starrs, Chief Executive Officer of TopGolf. Earlier today, the Company issued a press release announcing its first quarter 2025 financial results. Our earnings presentation as well as earnings press release are both available on our Investor Relations website under the Financial Results tab. Aside from revenue, the financial numbers reported and discussed on today's call are non-GAAP measures. We identify these 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. Please review the safe harbor statements contained in the presentation and the press release for a more complete description. With that, I'd like to turn the call over to Mr. Brewer.

Thank you, Katina. Good afternoon, everyone, and thank you for joining our call today. Starting on Slide 4. Q1 was a strong quarter for our company, as we met or beat expectations in all segments of our business. I was particularly pleased with the margin improvement in our products business as well as the consumers' response to recent initiatives at Topgolf. On the strategic front, we were pleased to announce an agreement to sell Jack Wolfskin to ANTA Sports, a transaction that will enable greater business focus as well as provide further financial flexibility as we move forward on our strategic process for TopGolf. Before I go into the segment results, I'll provide some comments on tariffs and their impact on us, both in the near and long term. Needless to say, it's tough to predict the exact impact at this point, as we can't be sure what the final rates will be. During our last call, we forecast approximately a $5 million impact based on what we knew at that time. As of this call, and assuming current rates of approximately 10% for all countries of origin other than Mexico, Canada and China, this year's unmitigated impact would be approximately $25 million, an increase of $20 million versus our last call. Looking forward, if these are the final rates, we believe we will be able to mitigate some portion by further optimizing operations and accelerating cost reduction and margin programs. We then believe we will have the ability to pass the balance on with only a minor impact to demand. We believe we are benefiting from having been proactive on cost and margin initiatives over the last 12 months and then accelerating them further recently as well as from the scale, brand strength and capabilities of our organization. Having…

Thanks, Chip. I'd like to share our performance for each of our key focus areas, along with what to expect for Q2 2025 and balance of year, starting with same venue sales. As Chip mentioned, Topgolf's Q1 same venue sales were down 12% and in line with our guidance. Three plus bay corporate events were down 13%, and the one to two bay business was down 12%. One to two bay traffic was down 8% and average spend per visit was down 4%. And while same venue sales were challenged in Q1, we have made substantial progress in the focus areas, more compelling and accessible value, new and relevant experiences for our players and a streamlined corporate structure. Our number one priority is to drive traffic growth and improve value perception, which we believe is key as we navigate the current environment and for the long-term health of the brand. Overall traffic in the second quarter through April is approximately flat year-over-year with one to two bay traffic up low single digits. We can directly attribute this to specific new offers and meaningful improvement in our price value consumer metrics. I'll cover in more detail the specific initiatives driving these results, but first, I'd like to comment on the consumer and our events business. As we enter Q2 on the macro front, we are clearly seeing a price-sensitive consumer. While traffic was positive in April, same venue sales were down approximately 10% with three plus bay down 17% and one- to two-bay down 8%. We continue to see players manage their spend, which we are addressing with targeted food and beverage offerings, which cater to group social locations. In addition, our events business is pressured as corporate spending on team outings and entertainment has reduced. It's clear that our corporate…

Thank you, Artie, and good afternoon, everyone. Jumping into our Q1 results. Consolidated revenues of $1.09 billion decreased 5% year-over-year. This result was better than expected and was primarily due to the decrease in Topgolf same venue sales, the rightsizing of the Jack Wolfskin business and unfavorable foreign currency rates. Q1 adjusted EBITDA of $167 million increased 4%, primarily due to increased profitability in the Golf Equipment and Active Lifestyle segments. The majority of this improvement was driven by improved gross margins and OpEx reductions. The segment has also benefited from a planned $12 million incentive to terminate early our lease for our Japan headquarters. Approximately 2/3 of the incentive impacted the Golf Equipment segment and 1/3 affected the Active Lifestyle segment. Both segments will incur some incremental expense in subsequent quarters for the relocation of the Japan headquarters. Moving to segment performance. At Topgolf, Q1 revenue decreased 7% year-over-year due to the decline in same venue sales and the sale of the World Golf Tour business in December 2024, partially offset by revenue from new venues. Topgolf Q1 operating income decreased $15 million to a $12 million loss, while adjusted EBITDA decreased $16 million year-over-year to $44 million. These declines were primarily due to lower same venue sales performance, partially offset by ongoing cost reduction efforts. Moving to the Golf Equipment segment. Q1 revenue decreased 1% to $444 million year-over-year and was approximately flat on a constant currency basis despite a more competitive launch environment. Golf Equipment operating income increased 24% to $102 million. The $20 million increase was due to our improved gross margins, the impact of the lease termination incentive and other cost savings. In our Active Lifestyle segment, Q1 revenue decreased $17 million year-over-year to $255 million. This decrease is due to the planned rightsizing of…

We will now begin the question-and-answer session. [Operator Instructions] Our first question today is from Matthew Boss with JPMorgan. Please go ahead.

Great and I appreciate all the color. So maybe, Chip, on the core Golf Equipment business, any change in the industry backdrop that you've seen so far for the segment. Can you touch on sell-through rates maybe on some of the key recent launches? Or just any change to your organic outlook for this year in that segment?

Matt, the short answer is no, not really. The golf consumer remains strong, the markets remain solid, and the outlook remains positive with no material change. So, Golf business has been on a good role. It remains that way, and we feel good about the outlook there.

Great. And then maybe, Artie, as a follow-up. So, on the value reset at Topgolf, I guess maybe a similar question. How much do you attribute the softening that you've cited to macro relative to competition? And just maybe how best to consider the time line to scale the value initiatives or any feedback that you've seen from tests that you've initiated to date.

Sure. Well, I think on the macro front, the most direct impact we saw since last earnings would be on the event side. So, we're clearly seeing corporate spending pressure and that's pretty direct in macro. I think the brand has been around for a while, and we're very confident that the events business is super competitive and the experience and feedback we get on to this great. It's just the environment for event spending from corporates in particular is pressured. The consumer is definitely price sensitive. I wouldn't say that it's materially different today than it was 45 to 90 days ago. But what I'm excited about is the immediate response. I think the traffic numbers kind of speak for themselves. We're certainly investing in it with value and doing right by the consumer in this environment. But the immediate response is probably what I'm probably most enthusiastic on in this concept of it not only being compelling, but accessible. This is an environment where you've got to give value to -- we have to give value to our players when they can use it. So, I think last time we talked a little bit about the shorter time period, this is we're hitting the bull's eye. Sunday Funday is, I think, a perfect example of when -- at a time when families can use it and need it and they're showing up. In terms of the rollout timing, we're moving very quickly. I think we're moving faster than we had intimated last time. So, we have Sunday Funday. It's active in every venue of the venues have value attached to it. Topgolf Nights is in approximately half the portfolio now. And the early week value, which back to this concept of being compelling and accessible becomes more accessible as kids get out of school, we'll be monitoring that very closely as we get -- we're in the middle of a college graduation period right now and then schools start getting out of school across our portfolio here in the coming weeks. So, we'll be ready to activate it as we see it perform, but we're pleased so far.

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

Maybe just a follow-up to Matt's questions around the value repositioning at Topgolf, but maybe from a cost perspective. I mean how do you plan to manage the venue level cost structure going forward? I think you talked about venue level margins coming down a bit in the near term. But how do we think about that longer term?

Yes. So, we remain extremely confident. I think the last few years, we've grown venue margins in various sales environment. So, I'm as bullish as I've ever been on the long-term EBITDAR margin outlook for Topgolf. And I think what -- I'll just restate what we've said before, we think they can be north of 35%. We're choosing to invest in value at this point in time, and we're not going to compromise the player experience. We view this environment as a time that we can acquire customers. We can acquire players. And we're seeing new players and repeat players respond to the offer. And when this environment subsides, we'll be in a fantastic position. I view the investments and improvements we've made in venue level performance as appropriate and relevant for us to be investing value at this moment. Some of the specific things we have done, we've obviously taken a fair amount of cost out of our corporate overhead and some areas of the business that are outside of the venues. Inside the venues, I'd just say the efficiency metrics, we just continue, to -- every couple of quarters, we roll out another iteration of our labor model. When you change demand when people are coming in more on Sunday, Monday through Thursday, late night, Friday and Saturday, it gives you an opportunity to kind of refresh those models and our teams are just responding really well. So just continue to be very optimistic about venue margins in the long term, but we are investing in the near term in value.

Okay. That's great color. And just sticking on Topgolf. Maybe give us a feel for the cadence of the quarter. And just wondering, was there any impact from the Easter shift to the later Easter into the second quarter?

Yes, there's definitely a shift that kind of goes both ways for us, where Easter week ends up not being much of an event week. The flip side is, is it -- you got some -- kids are out of school and the brakes are a little bit different. So, it did shift it a little bit, but I wouldn't say that it was material in terms of month-to-month or informing our guidance. As I mentioned, we're pleased with the pickup of the walk-in side of the business in April, and events have softened, and that informs the guidance we put forward for Q2.

The next question is from Megan Clapp with Morgan Stanley. Please go ahead.

Wanted to ask a little bit about the cost savings that you've talked about. I think Chip and Brian, you both mentioned that proactive cost savings are positioning you to be able to hold the guidance today despite some -- despite the tariffs and the reduction in top golf revenue. When we think about the cost savings, has what you've done? Is it just coming in better than you anticipated? Or are there incremental cost savings you've identified? And if it is that latter, could you maybe just expand a bit more on the products versus top golf side, what some of those cost savings are?

Sure, Meghan. I'll take a cut at it. It's a little bit of both. So, we were aggressive at going after cost and efficiency improvements really starting this time last year and accelerating through the year. And then as we saw the conditions flashing more risk, which we clearly did going into this year as we saw FX headwinds and announced policy changes that were likely to be impactful, we've accelerated our efforts to manage those costs and improve efficiency. And it's really across all areas of the business. Artie can speak to Topgolf, but they did meaningful reductions in the corporate overhead, portions of which were last year, but then accelerated significantly this year. We have done the same here at the corporate side of Topgolf Callaway. We are driving further efficiencies in the operations side of the business. So, there's quite a bit going on, on all fronts there. But the fact that we had, had that -- those wheels in motion already and then just could continue and accelerate them, I think, has benefited the business a great deal, and it allowed us to -- that plus a strong start to the year has allowed us to hold our current position.

Great. That's helpful. And then maybe just a follow-up. Very helpful commentary on an update on the spin and how you think about leverage for both businesses. Wondered, you had previously said that Topgolf would be funded with -- I think it was approximately $200 million in cash as part of the separation plan. I wondered, if you could maybe give us an update on that number in particular and whether your view on the cash level has changed at all, just given how much the macro has changed?

Megan, it's Brian. You're correct. We did say originally that we -- plan at that time was to have no funded debt, just the venue liabilities with Topgolf and give them $200 million in cash. But a lot has changed since then. The whole environment has changed. And so, we're reassessing the capital structure. And while we're not ready to give specifics, I will say that we would expect to give them less cash at this point and probably a modest amount of debt, which they can easily handle. And this is all designed to make sure that both businesses are set up and that the RemainCo is not too overly levered.

The next question is from Lucas Hudson with Bank of America. Please go ahead.

How much of the Topgolf same venue sales reduction was the result of April trends versus more cautious outlook in 3Q and 4Q from a softer consumer?

Yes. Thanks. This is Artie. I would say the primary thing that drove it is just the view on events. So, events in the quarter and then as we look out this quarter, that really is what drove the bulk of it. When we look at our walk in one- to two-bay business, we're seeing improved traffic trends, we're obviously investing in value and getting some SPV down year-over-year from that, but it's primarily three plus bay abouts.

Got it. And then just staying on Topgolf same venue sales regarding 2Q guide. Could you just talk about what you have to do to hit the top or the bottom end of the guide?

Yes. I think it's an extension in my prior comment. I think the range of the guide contemplates the midpoint contemplates what we're currently seeing. And if three plus bay events were to come in worse than we currently expect, then that would inform that sort of the lower end or the worse end of the guide.

The next question is from J.P. Wollam with ROTH Capital Partners. Please go ahead.

Just again, kind of thinking about the value reset at Topgolf and at risk of being overly reductive, I'm just curious like, is there a way that you're thinking about how much you're effectively trying to kind of reduce price, if I was thinking about sort of a weighted average in terms of hourly price per day. Is there just kind of a high-level way that you guys think like we need to be 10% to 20% lower?

Yes. I think it differs. And hopefully, with the detail we've given you, we're trying to be very methodical about this by venue, by market, by region, and then there's also a day and week part component to it. So, the data doesn't suggest like a crude percentage. The data suggests that there are certain times of the week and certain times of the day that we have an absolute right to win and if we have a more compelling price point, we can drive traffic, and we're seeing that. So embedded the breakdown I provided in the script, sort of 1/3, 1/3, 1/3 across the booking fees, alcohol attachment, we think, is something that's just price sensitivity of the consumer and then 1/3 coming from value, that's probably the best guidance I could give you across the whole revenue structure, if you want to call it that. What I might say is if you look at Sunday and you look at Topgolf Nights, depending upon the venue, that could be 15% to 20% of a venues volume in a given week. And if you think about gameplay being approximately half of our revenue stream, and then the price that we put into market could be 30% or 40% off of that. It kind of gets close to that 1/3, 1/3, 1/3 I share it as the overall breakdown.

Okay. Very helpful. And then just one more. Chip, maybe more on a kind of high-level basis here. But we've heard from kind of a few different companies, maybe pleasant surprises about less impact from tariffs and understand that that's a moving target every single day. But I guess the one thing that is pretty repetitive is price being somewhat of a lever and ideally not one that anyone wants to pull, but definitely a lever that could help offset. And so, as we think about kind of the back half of the year and into next year, how much do you guys worry that you could see a good amount of price increases across the industry and it might kind of slow some demand headed into next year?

Yes, JP. Obviously, that's something that we give quite a bit of thought to. And we have three different segments of business, and all three of those segments have unique and different positions as they relate to the consumer. So, if you look at our Golf Equipment business, we do not -- we think we have the ability to take price there. In other words, the elasticity of demand to price isn't particularly high. If we deliver a pleasingly different demonstrably superior product, and have to raise price a little bit, it has proven over time that the consumer will generally accept that price with minimal impact to demand. And – so, we're in a fortunate position there. It's also a relatively wealthy consumer that's highly passionate. In the Active Lifestyle category, it's a little less clear than that. It's a little more sensitive to price than Golf Equipment, but not overly sensitive. We again are in a premium category with TravisMathew being the anchor brand remaining in that category in addition to Callaway. So not highly sensitive but not as potentially inelastic as the golf equipment business. And then Artie's business at Topgolf, that consumer is roughly $100,000 a year consumer on average and value positioning there and proposition is turning out to be fairly relevant for us, and we're taking the appropriate steps there. But in the product side of our business, we think we're relatively well positioned. And as you could tell, we also have -- the ops team has done a nice job. We're not really in China in any meaningful or noticeable manner. And so, the tariff impact isn't as big as it is for some others, plus our ability to manage through the process is certainly, we think, higher and proven.

Next question is from Casey Alexander with Compass Point. Please go ahead.

I only have a couple of questions. First of all, Chip, did you get the sense that some of the strong results in the Golf Equipment division were from orders pulling through early and kind of front-running the tariff regime?

We did not see that in Golf Equipment, no, not from our customer base.

Okay. That's fine. Great. Secondly, it sounds like the value proposition is driven towards the one-bay -- the one- to two-bay, and yet I heard a couple of times that a lot of the softness is in the three plus bay. Is there also a value orientation program driven towards the events business? Are you thinking of the Events business as something that's temporary corporations will come back and it's still a high-touch premium product?

Yes. Good question, Casey. I think what we're doing on the event side is we're offering more kind of local regional flexibility just in the direct sales channel. So, you wouldn't necessarily see it on the rate card, so to speak. But we're trying to win every sale that's out there and giving our teams the flexibility and incentives to do that. But we agree with you. We think we have a great product, and it is a premium product. It's good value, too. But how you approach it in the market via advertising presentation on the website is just a little bit different than the player-facing business or the one- to two-bay business.

Yes, Casey.

If I understand what you're saying, then it's on a call-by-call basis and the sales rep has the ability to compete with, if its Bolero or whoever you're competing with?

That's right. And I'd say, it's a little bit more than a call-by-call basis where we'll have like a day of week where we'll have a specific promotion that we're trying to push through, through the events channel. But it's a bit more market by market versus "across the entire portfolio at ex price."

Sorry to interrupt you, Chip.

No, that's okay, Casey. And this is probably something you already know. But the events business isn't as sensitive to price as the consumer channel is, right? What's going on right now in many cases is just corporations are pulling back on all discretionary spending. And if somebody came in and said, "Hey, Chip, I can get a great event, but it's going to be 10% off, what do you think " The answer is still no. And so, we're finding that the consumer is responding very clearly to the quality of the product we're putting out at Topgolf combined with good value. And the event is just less responsive to that. It will turn around with overall corporate confidence more than it will respond to value, but we are providing some.

Sounds to me like it's time to have a no tariff pricing night at Topgolf.

There are no tariffs at Topgolf, Casey.

The next question is from Noah Zatzkin with KeyBanc Capital Markets. Please go ahead.

I guess nice margin improvement on the equipment side. So, I was wondering if you could kind of talk a bit about the drivers there and how you're thinking about equipment margins this year in general.

Yes. Thank you, Noah. We appreciate it. We were really pleased with that as well. So, we saw improvement in OpEx, but particularly, we saw improvement in the gross margin. So gross margin was up a couple of hundred basis points year-over-year. And we were pleased with that. It's coming from multiple areas and these initiatives that we put in place over the last several quarters in terms of improving our yields, freight, operating efficiency, working on the mix, et cetera. It comes from lots of different areas, but it's starting to manifest itself. Now having said that, the tariff impact that we will experience and we will mitigate portions of it, but we will have some level of tariff impact that will obviously start to manifest itself increasingly through the year, and was -- did not have any significant impact in Q1.

Great. And maybe just one on kind of the industry. Any sense of maybe how retail or the consumer behaved on the Equipment side in April? And any sense of kind of the promo level that's out there right now?

No real change. The golf consumer remains solid and fully engaged and promotional activity is either consistent with how it normally is or maybe even a little bit better.

The next question is from Joe Altobello with Raymond James. Please go ahead.

Just a quick question on Topgolf. You mentioned you're taking out a lot of corporate costs here. And at the same time, you're prepping that business for potentially a sale or spin, with the spin-off potentially requiring additional infrastructure, how do you balance the need to take out costs with the need to maybe build up some of the capabilities in that business ahead of the spin? And does that impact your decision on a sale or spin at all.

Casey, I think that we are -- I mean sorry, Joe, I think we are open to whatever create some most shareholder value. So, we're analyzing spin or sale, we will explore that and do whatever creates the most. We are continuing to do the cost reductions, which are -- as Chip mentioned, which are funding a lot of the initiatives we have out there now and balancing that with, but there's not that much incremental costs we're going to have to add for Topgolf to go stand-alone.

Okay. And just maybe a quick follow-up, just to clarify on the tariffs, the $25 million, does your guide assume that you mitigate pretty much all of that?

We don't specify how much we mitigate of that, but it is all included in our guidance. Does that make sense?

Yes, it does.

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

All right. Well, I want to thank everybody for joining us today. Enjoy the rest of your spring and into the summer. I hope you get out and play some golf, maybe visit Topgolf. We look forward to updating you further on our next call, which will be end of the summer. Thank you.

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