Topgolf Callaway Brands Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 13, 2024

Key Takeaways

  • Callaway delivered positive free cash flow of $160 million consolidated (and $221 million embedded) in FY 2023, beating Q4 revenue and EBITDA expectations, and expects FCF, EBITDA and EPS to ramp significantly from 2025.
  • Topgolf venues achieved full-year +1% same-venue sales growth with 100 bps EBITDA margin expansion, opened 12 new sites in 2023, plans eight net builds in 2024, and is rolling out midweek promotions and digital upgrades to stabilize comps.
  • Management is unlocking cross-brand synergies through a consumer data platform (live H2 2024) and initiatives like in-bay Callaway club trials, co-branded balls and gloves, leveraging 30 million+ Topgolf visitors as a major golfer-acquisition channel.
  • The golf equipment segment held the #1 U.S. club market share, launched AI Smoke drivers, AI1 putters and the premium CHROME TOUR ball line, and forecasts low-to-mid single-digit revenue and profit growth in 2024.
  • The Active Lifestyle business grew 9% in 2023 led by TravisMathew’s expansion (including women’s apparel) with 6 new stores, plans 8–10 new stores in 2024, while Jack Wolfskin aims to stabilize European operations after 2023 breakeven results.
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Earnings Conference Call
Topgolf Callaway Brands Q4 2023
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good afternoon, and welcome to the Topgolf Callaway Brands Q4 and Full Year 2023 Earnings Conference Call. All participants will be in listen only mode. Please note, this event is being recorded. I would now like to turn the conference over to Katina Metzodakis, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everyone. Welcome to Topgolf Callaway Brands 4th Quarter and Full Year 2023 Earnings Conference Call. I'm Kettina Mesodakis, 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. Earlier today, the company issued a press release announcing its Q4 and full year We've also published an updated presentation with supplemental information that we suggest you follow during today's call.

Speaker 1

If necessary, we will extend today's call to give ample time for our question and answer session. 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 U. S. Generally Accepted Accounting Principles.

Speaker 1

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 could cause actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statements contained in the presentation and the press release for a more complete description. And with that, I'd now like to turn the call over to Chip Brewer.

Speaker 2

Thank you, Kettina. Good afternoon and thank you for joining our call today everybody. Starting on Slide 3, we ended 2023 on a positive note, beating our Q4 expectations for both revenue and EBITDA. This was driven by continued strength in both our golf equipment business and at TravisMathew, as well as better than expected performance at Topgolf, where formed on strong holiday results and where we continue to drive improvements in venue level profitability. Looking across our businesses, for the full year, golf equipment delivered excellent brand performance, maintaining its leadership positions in golf club market shares and in the overall technology and innovation ranking.

Speaker 2

Our Active Lifestyle segment delivered solid growth in revenue and profitability, driven by continued momentum at TravisMathew. And at Topgolf, the team delivered 1% same venue sales growth for the full year on top of 7% growth in 2022, as well as an impressive 100 basis points of venue level adjusted EBITDA margin expansion. They also added 12 new venues with 11 new builds and 1 purchased via the Big Shots acquisition. 2023 also marked an important financial inflection point for our company, that being our transition to positive free cash flow. Our results showed $160,000,000 of free cash flow at the consolidated level and $49,000,000 at the Topgolf level.

Speaker 2

As you know, given the variable timing of REIT reimbursements, We believe the most appropriate cash flow metric is embedded cash flow, which is free cash flow excluding new venue and store growth CapEx. Using this metric, we delivered $221,000,000 $94,000,000 at the total company and Topgolf levels. These numbers reflect positive trends in our fundamentals. Looking forward, We expect our cash flow will stay meaningfully positive from here and that our embedded cash flow will increase slightly this year. We anticipate our EBITDA, cash flow and EPS growth will all ramp significantly in 2025 scale across our businesses and lower overall corporate interest expense as our positive cash flow allows us to pay down debt over time.

Speaker 2

In support of this, we're providing illustrative 2026 through 2028 numbers in our earnings deck. These are Exhibits 21 and 23. As I'm sure you can tell, I remain convinced and excited about the long term earnings power of this business. We have demonstrated the strength of our golf equipment business over a long period of time. The Callaway brand is strong and we are set up for an excellent 2024 with an outstanding new product range.

Speaker 2

Our Active Lifestyle segment has grown rapidly in both revenue and profits. And although the Topgolf business has some post COVID same venue sales volatility. When you look past that, you see a business that is clearly strengthening and proving itself as a unique and appreciating asset with strong returns. Topgolf's track record for selecting and opening venues is extraordinary. They virtually all do well and average opening results have exceeded our targets.

Speaker 2

This is a skill set that has been built up over years and relies on multiple teams and functions across our organization. It makes us unique. Others have tried, but as of yet, no one has been able to replicate our model. And it supports our strong confidence in our capital allocation strategy. In addition, our venues are increasingly profitable over time with what we believe is a clear path to further upside.

Speaker 2

I'll even add, we have now shown we can do this in the face of same venue sales volatility. In short, The venues are achieving the return targets we communicated and are long, durable and appreciating assets. To help demonstrate these points, we have included updated cohort and historical data in our earnings presentation. These are slides 16 through 18. They show increasing average venue sales over time and increasing EBITDAR.

Speaker 2

There is volatility over short periods of time, but over the longer periods, the trends are clear. As for the durability of the assets, The UK venues are now approaching 20 years old and still continue to grow both sales and profitability. Before speaking about where we're going this year, I'd like to put our longer term opportunity into context by highlighting the underlying strength of the sport of golf and how the modern golf ecosystem is evolving. As shown on Slide 4, per the National Golf Foundation, There are now a total of 45,000,000 on and off course golfers, up 9% year over year and up 32% since 2019. Within this, an estimated 26,600,000 Americans played golf OnCourse in 2023, up $1,000,000 year over year in what was the largest 1 year growth in participants since 2,001 driven by an all time high of first time on course golfers of 3,400,000.

Speaker 2

I believe it is both impressive and instructive that this far past COVID, on course golf is still seeing this kind of momentum. At the same time, 32,900,000 Americans participated in off course golf, up 18% year over year and up 41% since 2019. The game of golf at large is clearly benefiting from a large influx of Capital, the benefit of more flexible work environments, a positive change in perception of the game, especially with teens and young adults and the structural growth of off course golf. Within this context, Topgolf alone is adding 3000000 to 4000000 new unique visitors each year And we'll have over 30,000,000 unique visitors in 2024, thus making it a major force in overall golf with a larger individual participation than total on course golf. In response to those that may question if Off Course Golf will drive OnCourse, we now know that around 2 thirds of Today's on course beginners are coming to the course with off course experience compared to less than 40% 5 years ago And already 10% of today's total on course players credit Topgolf for getting them to the golf course.

Speaker 2

Now turning to our 2024 guidance. I'm proud to report that we are once again projecting growth in revenue, EBITDA and embedded cash flow. We have also planned our business somewhat conservatively given the uncertain consumer environment And we are continuing to invest in key corporate infrastructure and profitability initiatives, both at the corporate level and at Topgolf. Like our venues, we feel very good about the long term returns on these investments and we believe we will show leverage on them relatively quickly, most likely by 2025. Lastly, Via specific projects, some of which I'll share with you today and with more to come throughout the year, We are also now entering the stage where we will be unlocking more of the exciting revenue, brand and digital synergies that our structure uniquely allow.

Speaker 2

Now I'd like to walk you through our business segment performance. At our Topgolf venue business, both during the quarter and for the full year, we made progress on our 3 key performance drivers. Starting with venue unit growth. We successfully and strongly opened 8 venues in Q4 for a total of 11 new venues in 2023. Our new venues continue to perform extremely well.

Speaker 2

We also added one venue via acquisition in 2023 and in early January of this year, We purchased one additional venue from Big Shots in Bryan, Texas adjacent to Texas A&M University for approximately $7,000,000 As of this call, we now own and operate 94 venues and have 5 Topgolf franchise locations and 3 Big Shot franchisee locations. We expect to add another 7 new Topgolf venues this year, 2 in the first half and 5 in the second half, for a total of 8 new venues in 2024. We also expect to help open 2 international franchisee locations. For 2025, we're expecting to return to opening 10 to 11 new owned venues. Moving on to same venue sales performance.

Speaker 2

In Q4, our same venue sales declined 3%, which was meaningfully ahead of our expectations, driven by stronger than expected results in our 1 to 2 tumor oriented business, particularly at the end of December. For the quarter, our 1 to 2 bay same venue sales was flat, just as it was in Q3. Our 3 plus Bay, primarily corporate business, continued to stabilize during the quarter and had its 2nd consecutive quarter of relative improvement. As a reminder, corporate is usually approximately 30% of sales in Q4 and 20% for the full year. Our December results were undoubtedly helped by weather as we had challenging weather in December 2022, but seasonally very mild weather in December 2023.

Speaker 2

Having discussed the quarter, I'm pleased to report the full year same venue sales ended in positive territory, up 1%. This is a notable achievement, particularly when you consider the strength of our 2022 same menu sales growth and the strong 2 year stacks as shown in Exhibit 9. Our 1 to 2 Bay business, which is primarily consumer and comprises 80% of our annual venue revenues was up 4% for the full year. And when you consider our comp sales versus pre COVID levels, Our 1 and 2 Bay consumer business is up 11% versus 2019, while the 3 plus Bay corporate business is up 1%. Looking ahead, our 2024 guidance recognizes a tough comp in Q1 and some poor weather to start the year in January.

Speaker 2

With this, we're expecting Q1 same menu sales to be down potentially high single digits. After Q1, we see somewhat easier comps and are forecasting approximately flat same venue sales for the full year. As we've previously discussed, our two points of weakness on same venue sales during the second half of twenty twenty three We're Midweek Traffic and Events. To help address the midweek opportunity, we're in process of implementing weekday promotions, primarily half off gameplay Monday through Wednesday via the app. Our test markets indicate this new midweek promotion will help keep us competitive with other entertainment and leisure options.

Speaker 2

We'll be net profitable and will also help drive our digital business, which will in turn provide a long term benefit. We do not believe they will be a major driver of sales growth, but they will help and appear to be an appropriate response that balances short and long term needs. To help further stabilize events, we're improving our programs and value adds for both smaller events such as team buildings or birthday parties as well as larger corporate bookings. Looking further downfield, we are developing additional consumer offerings, not necessarily value oriented that we are going to be announcing in early Q2. We're also starting to really scale our digital offerings, something I'll speak more about in a moment.

Speaker 2

We believe both of these initiatives will be appealing to consumers and could create upside. Moving on to our 3rd and final key performance driver, venue margin expansion. This is really the biggest highlight of 2020 3 for Topgolf. Topgolf has experienced increased efficiencies driven by our pie inventory management system along with a new labor model and COGS initiatives that together are working beautifully. As a result, Our 2023 venue level adjusted EBITDA margin increased approximately 100 basis points year over year to approximately 34%.

Speaker 2

And in Q4 alone, we expanded EBITDAR by approximately 370 basis points despite our highest margin business, the events business being down during the quarter. Hopefully, this provides confidence in our ability to continue to drive improvements in this important metric. 2023 was an important year for laying the technology foundation in our venues with the rollout of Top Tracer across all U. S. Venues, thus allowing a common gaming platform as well as the rollout of our pie inventory management and booking system across all venues.

Speaker 2

These critical steps enable us to turn our efforts towards accelerating in venue digital capabilities, creating new gaming innovation as well as bringing cross brand synergies to life in 2024 and beyond. To this end, we've created a new commercial and digital team within Topgolf, dedicated to optimizing revenue management and driving our digital business. Examples of what the Topgolf Digital team is working on are shown on Slide 13, And I encourage you to review it, so you have the appropriate feel for the impact these initiatives will have on our business. One specific project that I'll mention is our company wide consumer data platform, which is now expected to be up and running by the second half of this year. This important project will unlock digital synergies across the brands and is expected to be a significant catalyst future growth opportunities across our brand portfolio.

Speaker 2

Speaking of cross brand synergies, There's a lot to be excited about in the coming weeks as shown on Slide 14. Starting just last week, all Topgolf players We'll have the opportunity to upgrade the Callaway branded premium clubs at all venues. By mid year, this will include clubs Specifically designed by Callaway for use in Bay by both established golfers and those new to the game. In the near future, we will be able to upsell this program via the app and in reservations. All Topgolf golf professionals are on Callaway Golf staff and can now exclusively sell Callaway Golf equipment to their students.

Speaker 2

Callaway will be hosting organized club fitting events at all venues beginning with the 1st major of 2024 and will also be the official equipment sponsor of Topgolf's League Nights. In addition, our respective marketing teams are leaning into our Callaway Chrome Tour Golf Ball launch to promote sales and trial of our new golf ball. Our goal is 200,000 new users coming specifically from Topgolf. We also plan to show various Callaway branded limited edition golf balls in venues throughout the year. We have an exciting Callaway and Topgolf golf glove program that will run across all venues And TravisMathew will increase his presence in approximately 1 third of the venues where the price point works effectively.

Speaker 2

And later in the year, we'll be implementing a new Callaway digital kiosk in the lobby of all venues, A piece that we hope will amaze and delight all the new and existing golfers that visit the venues during the year. Also towards the end of this year or early next, we'll be introducing specific Callaway branded golf equipment designed for the beginner golfers being introduced the sport via Topgolf. We will then leverage the consumer data platform and our digital teams to market this product to these new players, thus creating a competitive advantage and reach to what should be the largest single source of new golfers in the modern golf ecosystem. We expect over 30,000,000 unique players will walk into Topgolf venues in 2024. With a strong in venue Callaway brand presence, The ability to trial Callaway premium equipment in our bays and an advantage in digital reach as well.

Speaker 2

We're excited about Brand Callaway being front and center with this next generation of modern golfers. At the same time, Callaway and TravisMathew will be working to drive awareness and business to Topgolf. All of this is in addition to the synergies we've already been enjoying such as a lower cost of capital and faster venue expansion at Topgolf, shared corporate services, top tracer sales synergies, tour exposure as well as other key partnerships across the brands and operational support including distribution and sourcing. Our 2024 forecast for Topgolf is specifically called out in our guidance section, so I won't speak to it directly here. I'll add that we expect Topgolf to be free cash flow positive on its own right and we're delighted with the direction of the business.

Speaker 2

Moving to golf equipment. The business performed exceptionally well from a brand perspective in 20 23. Our U. S. Dollar market share placed us as the number one club brand and the number 2 golf ball brand.

Speaker 2

In clubs alone, we were the number 1 in total clubs, drivers, fairy woods, Hybrids and irons. This was led by our 2023 launch of Paradigm. In Q4, we had a highly successful launch of our new AI1 putter line. Global revenues were up 5% in Q4 and approximately flat on a full year currency neutral basis despite an approximately $100,000,000 headwind related to 20 22's retail inventory catch up. Golf demand remained robust through 2023.

Speaker 2

Rounds played grew 4% year over year and 2023 marks the 4th year in a row where rounds played have exceeded $500,000,000 And I've already discussed with you the strength and participation, including new entrants. In early January, we announced some very exciting new launches in both clubs and golf ball. In clubs, our new family of AI smoke drivers, fairywoods and irons truly embody Callaway's leadership in R and D. These clubs feature an AI smart face, which optimizes performance using swing dynamics from thousands of golfers and micro deflections across the face. Our marketing people say it's best.

Speaker 2

It's sweeter from every spot, both longer and more forgiving. On the ball side, we recently launched our new line of CHROME TOUR, CHROME TOUR X and CHROME SOFT golf balls, which reflect the culmination of many years of R and D work as well as the extensive upgrade of our Chicopee Ball manufacturing facility. We are effectively launching a new brand in CHROME TOUR, a brand that will complement our existing strength in Chrome Soft and Super Soft. This is a big launch for us and something we don't take lightly. We deferred doing it previously instead waiting until we further proved out our design thesis and manufacturing capabilities.

Speaker 2

We are proud of our record in golf ball And both our sales and market share record over the last 8 years supports this. Still, we believe we have more potential. We believe we make the best performing and most consistent ball in golf and we now feel ready to tell the world about it. As we forecast the golf equipment segment for 2024, we're encouraged that field inventories have returned to more normalized and healthy levels With no abnormal items to lap this year and consumer interest in the game remains high And we're excited about the potential opportunity for our business to outperform the market given the strength of our new launches. As a result, we expect both revenues and profits to be up in this segment.

Speaker 2

Switching gears to our 3rd and final segment, our Active Lifestyle division grew 9% in 2023 and continue to expand margins. Top line growth was driven by continued brand momentum at TravisMathew, which had a strong year from both a top and bottom line perspective. In 2023, TravisMathew grew in all channels, including adding 6 new stores and launching into the women's category. In 2024, they plan to open 8 to 10 new stores, slowly expand their international footprint as well as amplify the fantastic women's product with marketing and stronger in store exposure. The women's product is resonating nicely.

Speaker 2

And although it is still small, from a percentage basis, We're optimistic on its long term potential. Also at TravisMathew, in 2023, we had $35,000,000 inventory fill in in our corporate channel that will not repeat in 2024. This will cause some year over year comparison issues for 2024 versus 2023. Excluding this, We continue to expect strong revenue growth at TravisMathew both this year and going forward. Jack Wolfskin margins were challenged in Q4 due to continued softness in Europe, driven by continued high field inventories and despite strong performance in China both in Q4 and for the full year.

Speaker 2

That said, the Jack Wolfskin business grew slightly on the top line and was approximately breakeven in EBITDA in 2023 overall. We now have new leadership in place in Europe And we're optimistic for stabilization followed by growth during the balance of 2024 and into 2025. Overall, for 2024, we're expecting approximately flat revenues with operating income slightly down in this segment. In conclusion, 2023 ended on a strong note and 2024 has begun with exciting new products and programs across our brands. We remain confident in our strategic initiatives our ability to grow our cash flows from here.

Speaker 2

The growth is forecast to be modest for 2024 as we both continue to invest in the business and we are also planning cautiously. Cash flow, EBITDA and EPS then ramp nicely as our cash flow compounds and as we leverage our scale. Thank you for your time today. And Brian, over to you.

Speaker 3

Thank you, Chip, and good afternoon, everyone. As Chip mentioned, we are pleased with how we finished 2023. We had 4th quarter revenue growth across each of our operating segments. Topgolf opened 8 new venues in the 4th quarter alone and finished the year with same venue sales growth of +1%, while also increasing venue level adjusted EBITDAR margins by approximately 100 basis points year over year. Our golf equipment business finished the year with the number 1 U.

Speaker 3

S. Golf equipment market share for golf clubs and number 2 in golf balls. We also achieved positive free cash flow for the year both on a consolidated basis and at Topgolf. Those were important financial milestones for us and we achieved them well ahead of our plan that we set at the time of the merger. We remain in the strong financial position.

Speaker 3

Our cash and cash equivalents increased $213,000,000 to $394,000,000 at December 31, 2023 compared to the prior year, which is after taking to account over $50,000,000 in common stock purchases, including $12,000,000 in the 4th quarter and deploying approximately $30,000,000 for the Big Shots acquisition. Our available liquidity, which is comprised of cash on hand and availability under our credit facilities increased $327,000,000 to $743,000,000 due to proceeds from the company's new term loan and better than expected cash flows this year. Given the strength of our businesses and our solid financial position, we believe we are well positioned entering 2024 and we expect to grow revenue, adjusted EBITDA and embedded cash flow again this year. Now turning to our 4th quarter results. We grew consolidated revenues 5% year over year to $897,000,000 driven by growth across all three operating segments and led by Topgolf venues which were up 9% and golf clubs which were up 17%.

Speaker 3

Given the seasonality of our businesses, we typically report an operating loss in the Q4. In the Q4 of 2023, Our non GAAP operating loss improved 74% to a loss of $6,600,000 This improvement was driven by a significant improvement in segment operating income in the top golf and active lifestyle segments. Non GAAP 4th quarter net loss increased approximately $5,400,000 compared to last year, largely due to the increased D and A and interest expense related to new venue development. Adjusted EBITDA $9,800,000 increased 91% compared to last year and exceeded the high end of our guidance range by approximately $12,000,000 due primarily to better than expected revenue and venue margins at Topgolf. Moving to segment performance.

Speaker 3

At Topgolf, Q4 revenue grew 7% driven primarily by new venues, partially offset by better than expected same venue sales of minus 3%. The beat in Q4 same venue sales was driven by better than expected traffic in our 1 and 2 Bay consumer business, which benefited from a strong holiday season and year over year favorable weather in December. Topgolf operating increased to $23,000,000 in the 4th quarter compared to $3,000,000 in the prior year and adjusted EBITDA increased $30,000,000 to $73,000,000 These improvements were driven primarily by the increased revenue as well as continued operational efficiency gains in the venues. The operational gains included improved labor management, the impact of pie being rolled out in all venues and lower food and beverage costs due to Topgolf's increased scale. Moving to Q4 results for golf equipment.

Speaker 3

Revenue increased 5% to $199,000,000 primarily due to an expected shift in golf club launches, partially offset by a decline in golf ball sales As we prepared for the 2024 launch of our new CHROME TOUR ball, which launched on February 2nd. Shop equipment operating income decreased $21,000,000 due to the expected lower production volumes in the second half of twenty twenty three as compared to the prior year resulting in unfavorable cost absorption as well as a return to normal promotional levels as we mentioned last quarter. Interactive Lifestyle segment Q4 revenue grew 3% primarily due to increased apparel sales, which was led by TravisMathew. Operating income increased to $20,000,000 compared to breakeven in the prior year. This increase was driven by increased revenue and margin as a result of a higher mix of margin accretive direct to consumer sales as well as tailwinds from lower input costs year over year.

Speaker 3

Moving to balance sheet and liquidity highlights. As I mentioned earlier, at December 31, 2023, Our available liquidity increased $327,000,000 to $743,000,000 compared to the prior year due to proceeds from the company's new term loan and better than expected cash flow this year. At year end, we had a total net debt of 2 point $2,000,000,000 which excludes convertible debt of approximately $258,000,000 compared to $1,900,000,000 at the end of 2022. This increase relates primarily to incremental new venue financing and the additional $300,000,000 of term loan debt. As a reminder, we think it is also helpful to evaluate our net leverage position by excluding the venue financing REIT debt, which is essentially capitalized rent with no additional principal or bullet repayment required.

Speaker 3

Excluding the REIT debt, our REIT adjusted net debt is $971,000,000 at the end of 2023 compared to $997,000,000 at the end of 2022. Our net debt leverage, which excludes convertible debt, was 3.8 times at December 31, 2023 compared to 3.4 times at the year end 2022. This change was driven by the opening of additional venues in Q4 2023 versus the prior year. Our REIT adjusted net debt leverage ratio is 1.9 times compared to 2.0 times in the prior year. We feel comfortable with these leverage levels.

Speaker 3

Our inventory balance decreased $165,000,000 or 17% from $959,000,000 at year end 2022 to $794,000,000 at the end of 2023, A significant achievement by our teams who actually manage this inventory reduction in light of the post COVID surge in 2022. We continue to expect our active lifestyle inventory to decrease in 2024 as our apparel businesses normalize their inventory. We feel good about the quality of our own majority. Capital expenditures for the 12 months ended December 31, 2023 were $482,000,000 and we received reimbursements of $277,000,000 from our REIT arrangements for net capital expenditures of $205,000,000 of which $146,000,000 is related to Topgolf. Net CapEx was approximately $30,000,000 lower than our $240,000,000 guidance due to the timing of REIT reimbursements.

Speaker 3

Consolidated free cash flow and embedded cash flow were $160,000,000 $221,000,000 respectively, both ahead of expectations. As a reminder, embedded cash flow was free cash flow minus growth CapEx for new venues and retail stores. This metric provides a good view of the cash generation power of our business as it stands today and it eliminates the noise from the timing of REIT reimbursements. Looking ahead, we believe we will grow embedded cash flow in 2024. In light of FX headwinds and continued corporate investments this year.

Speaker 3

The growth in embedded cash flow is expected to be modest in 2024, but ramp in 2025 through 2028. We also expect to remain free cash flow positive both in our consolidated business as well as Topgolf. Given our better than expected cash generation in 2023 and assuming we are on plan for 2024, we would expect to begin paying down our term loan debt later in 2024. I would now like to provide an update on our outlook for 2024. Our outlook reflects both our confidence in our business as well as a potentially softer consumer environment in 2024.

Speaker 3

All in all, we expect revenue, EBITDA and embedded cash flow growth in 2024. As I mentioned last quarter, we are in Phase 2 of our Topgolf journey. In Phase 1, we funded Topgolf's operations and venue development. This phase was very successful as we increased the pace of new venue development and at the same time improve venue profitability resulting in significant revenue and adjusted EBITDA growth. As expected, however, this accelerated development had a negative impact on earnings per share due to the increased interest expense and D and A associated with that development.

Speaker 3

Topgolf was now free cash flow positive and self funding with REIT or developer led financing and we have moved to Phase 2. In Phase 2 which we will be in through 2024, We expect to scale our business further, grow embedded cash flows and stabilize EPS. We also expect to be tail end of our post merger investments in corporate infrastructure. In 2025 through 2028, we expect to be in Phase 3 of our Topgolf journey where we will have further growth and our cash flows begin to meaningfully exceed our capital requirements. As a result of the increased scale, leveling of corporate investments and the impact of the cash flow generation on interest expense, we would expect EPS to begin to grow in 2025 and ramp from there.

Speaker 3

Before moving to specific 2024 guidance, I want to highlight why we have so much confidence in the long term performance of this business. I refer you to Slide 18, which depicts 2023 adjusted EBITDAR margin by venue cohort. As you know, our venues open well and quickly ramp to revenue, margin and profit generation. This is consistently true and an attractive element of the Topgolf business. As shown on Slide 18, you can see that the venue adjusted EBITDAR margin not only doesn't decrease with age of the venue, but if anything, it actually increases with age.

Speaker 3

And this effect is even more pronounced when looking at venue pre tax income due to the D and A being somewhat front loaded in the 1st 5 years. Overall, it is clear that Topgolf venues open with strong economics that improve over time and the venues are appreciating assets over the long term. At present, approximately half of our venues opened in the last 5 years. Accordingly, we expect the profit contribution from our venues to expand over time. With that said, let's turn to 2024 guidance.

Speaker 3

Looking at our 2024 guide holistically, As Chip mentioned, we view 2024 as an investment year in which we are focused on driving the digital transformation at Topgolf and separately largely finishing necessary post merger investments in corporate infrastructure including information technology systems and cybersecurity. Now let's look at more specific guidance for 2024. There will be a few headwinds as we enter 2024 in addition to the investments I just mentioned. First, there's a revenue headwind in the active lifestyle business that Chip called out earlier. The second is related to foreign currency.

Speaker 3

In addition to unfavorable translation based on recent rates, There are also foreign currency hedging gains in 2023 of approximately $13,400,000 that will not repeat in 2024. Overall, we estimate these foreign currency changes will negatively impact revenue by approximately $10,000,000 and adjusted EBITDA by approximately $20,000,000 Lastly, the Topgolf business will be lapping 11% growth in same venue sales in Q1 2023, which is partially due to a post COVID surge in our events business, which is resulting in our same venue sales estimates of down high single digits in Q1 and flat for the full year both as compared to 2023. For 2024, we anticipate consolidated net revenue growth of approximately 6% versus the prior year to $4,515,000,000 to $4,555,000,000 Consolidated revenue growth is expected to be driven by low single digit growth in the golf segment and growth of approximately 11% at Topgolf. The Topgolf growth is primarily due to new venue growth. Moving to 2024 adjusted EBITDA, we're guiding to a range of $620,000,000 to $640,000,000 which would represent growth of 4% to 7%, approximately commensurate with the projected revenue growth.

Speaker 3

As mentioned earlier, we would expect to begin to see leverage in 2025. We are projecting Topgolf adjusted EBITDA to $350,000,000 or 17.9 percent margin, which would be approximately 60 basis points of expansion on a year over year basis. We expect non GAAP diluted EPS of $0.26 to $0.34 compared to $0.49 this year. This decrease is primarily due to increased depreciation and amortization expense as well as increased venue financing interest due to additional venues. We have included in the investor deck today on Slide 23 an estimated walk from EBITDA to EPS for 2024.

Speaker 3

Finally, we expect to spend approximately $475,000,000 in gross capital expenditures in 2024 compared to $482,000,000 in 2023. The decrease is due to less new venue development in 2024 compared to the prior year. We estimate REIT reimbursements of $214,000,000 in 20.24 compared to $277,000,000 in 2023. Now turning to Q1 specifically. In Q1, we expect consolidated revenue of $1,140,000,000 to $1,160,000,000 flat to slightly down versus 2023.

Speaker 3

This decrease is largely related to the active lifestyle corporate channel headwind Chip mentioned and top costs expect to decrease in Q1 same venue sales. We also expect Q1 adjusted EBITDA of $130,000,000 to $140,000,000 compared to $157,000,000 in the prior year. This decrease is primarily related to the flat to down revenue combined with projected unfavorable FX in the 2024 investments. These factors along with increased D and A and interest expense related to new venues will negatively impact 1st quarter EPS, which we estimate to be approximately breakeven to a slight loss compared to $0.17 last year. We have provided today in the investor presentation a lot of new and more detailed information in response to investor inquiries.

Speaker 3

I hope you find this information helpful. Overall, we are pleased with where we are as a business. Despite significant headwinds Since the merger from unfavorable foreign currency and rising interest rates, we have achieved greater growth in cash flow than we expected at the time of the merger. We are also encouraged that we are at the tail end of our post merger investments and are beginning to capture the synergies with Topgolf as Chip described. We are excited about the progress we have made since the merger and beginning in 2025, we expect to reach the scale and infrastructure necessary to begin ramping embedded cash flow and earnings.

Speaker 3

We look forward to reporting to you on our progress. We will now open the call for questions. Operator, over to you.

Operator

The first question is from Alex Perry with Bank of America. Please go ahead.

Speaker 4

Hi, thanks for taking my question here.

Speaker 5

I guess I just wanted

Speaker 4

to ask what does the flat Topgolf comp assume in terms of walk in versus corporate? Maybe just give us some help in terms of how you're thinking about those two pieces of the business. Would you expect the corporate events business to return positive following the 1Q against the easier comps and what are your sort of forward bookings indicating? It looks like that accelerated a bit in the Q4. Is that a trend you expect to continue?

Speaker 4

Thank you.

Speaker 2

Sure, Alex. This is Chip. So for Q1, we're expecting a tough comp as you would expect overall, but specifically in the corporate business. The corporate business was still at that post COVID surge point in the Q1 last year and then we saw the change in trend after that. After Q1, we do expect corporate events to stabilize and We're already seeing that.

Speaker 2

You can see that in the data right now. The walk in business has been stable over the last several quarters and we do expect that to improve through the year as well. So we're seeing an improving trend. We have easier comps after Q1 and pretty clear direction, I think, in terms of what we've seen and consistency with what we've seen over the last 4 or 5 months.

Speaker 4

Perfect. That's really helpful. Best of luck going forward.

Speaker 2

Thank you.

Operator

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

Speaker 6

Yes, thanks. Could you maybe just to follow-up on that. Is there any way to quantify the weather impact to January and whether you've seen same menu sales improve from that level?

Speaker 2

Megan, we saw headwinds from weather in January. We saw tailwinds from weather in December, which is somewhat what you'd expect this time of year, some volatility around that. In January, The weather headwind was roughly about 200 basis points, 2.50 basis points relative to the full quarter. We don't read too much into that other than that's one of these things that happen this time of year. The trends that we were seeing in Really for the second half of last year are indeed the trends that are continuing and we feel good about overall of our same venue sales with some clear opportunities that we've talked about what the midweek promotions and the digital efforts and other initiatives that we're developing that we think will have a positive impact on same venue sales.

Speaker 6

Super helpful. I guess maybe to that point on some of the midweek promotions you're doing. I think you ran some tests during the Q4. I guess, how do you make sure that you've been doing this on Tuesday as well, but how do you make sure that it doesn't cannibalize some of the weekend traffic you're seeing?

Speaker 2

Well, we track that specifically and that is indeed The one thing that we were most guarded against. So, our results have indeed shown that it not only doesn't cannibalize the weekends, it's Additive from a traffic perspective and therefore net profitable. And we're obviously Also relatively measured in the promotion that we're now implementing half off gameplay only through the app, which is not too dissimilar from what we saw on the Tuesday. But we think that it will have a positive impact. And we did indeed trial that before we implement it.

Operator

The next question is from Randall Konik with Jefferies. Please go ahead.

Speaker 7

Hey, good evening everybody. I guess, Brian, maybe if you could give us some perspective on we know the comp guide for the Q1, we know the comp guide for Topgolf, I'm talking about for the year around flat. Can you give us a little perspective of how we should be thinking about that comp trajectory throughout the year? And then back on the midweek business for Topgolf versus the weekend business, Could you just give us some maybe frame it out a little bit on what's the difference? How different is the trend in midweek versus weekend?

Speaker 7

Are you still seeing a very stable Solid business on the weekends and the midweek has just been the problem that should be solved in the next quarter or so. Just to give us a little flavor on how we should be about the trajectory of Topgolf comps overall throughout the quarters and then midweek versus weekend would be super helpful. Thanks guys.

Speaker 2

Hey, Randy, it's Chip. I'm going to jump in on this one. And then Brian, if you have anything to add, jump in. We are still seeing strong results On the weekends, so the weekends are continuing to comp positively for us as we mentioned last quarter. So No change in trend on that.

Speaker 2

And through Q4, we continued to see a weaker overall result in the consumer business midweek. So those are consistent and it's also a good news story because we can be targeted about how we address that, specifically with it only being a midweek issue on the consumer portion of our business. And then in terms of how it's going to or at least we're forecasting it to work through the full year in terms of the same venue sales. The math works that we're projecting high single digit down in Q1 after a big comp gain a year ago in Q1. And then for the balance of the year, low to mid single digits positive to get us to that flat for the full year.

Speaker 2

Great.

Speaker 7

Thanks so much. Thank you.

Operator

The next question is from Daniel Imbro with Stephens Inc. Please go ahead.

Speaker 8

Yes. Hey, good evening, everybody. Thanks for

Speaker 3

taking our

Speaker 8

questions. So maybe I'll get away from the trend here. I'll ask about the non top part of the business, trying to look through the guidance a little bit. Obviously, you talked about a lot of exciting synergies and momentum. If we strip out Topgolf EBITDA from total, it looks like kind of remaining EBITDA will be down year over year in 2024.

Speaker 8

I know in 2023, we had headwinds in the golf equipment from lower production, but can you walk through the puts and takes Around why that core or that non top golf EBITDA will be lower year over year, Brian, in the guide?

Speaker 2

Brian, why don't you take that one and then I'll jump in.

Speaker 3

Sure. On the non comp, again, just want to remind you that FX is going to be a headwind next year. We talked about $10,000,000 revenue, but there's also some hedge gains about $13,000,000 $14,000,000 that are going away. And then there's a bunch of investments that we talked about during our script in the corporate business as well. So that's probably $30,000,000 headwind right there.

Speaker 3

$30,000,000

Speaker 2

And then Daniel, we are seeing the golf equipment business. We are projecting that to be up mid to high single digits this coming year. The active lifestyle, roughly flat. The golf equipment business increasing profitability. The active lifestyle, flat to slightly down.

Speaker 8

Helpful color. I'll take the rest offline. Thanks guys.

Operator

The next question is from Kate McShane with Goldman Sachs. Please go ahead.

Speaker 9

Hi. Thank you for taking our question. Just with regards to the new innovation, the AI Smoke, how big of a launch is this relative to the paradigm? And With the chrome tour golf ball, is there a significant price differential between that and the average ball price?

Speaker 2

Sure, Kate. Let me start on golf ball. Golf ball, this is a bigger launch for us than we had last year. It's our premium ball launch and in fact, it's basically a new brand that we're introducing to the market. So On the golf ball side, big launch, big opportunity.

Speaker 2

Pricing is up On this product versus where we were previous as well, and relative to average ball, Higher price point, in fact, this matches the price points of the most premium golf balls that have any market share in the market. In the club side of the game, the AI Smoke is a very Significant launch for us in a very comprehensive. It's similar in terms of scale to Paradigm. Potentially the one key differences in the irons side of that in that we're launching the irons for AI Smoke at a price point that fits a larger portion of the market, the paradigm iron was priced in a premium category, where the AI Smoke is more consistent with our irons that have historically established higher market share positions.

Speaker 9

Thank you.

Operator

The next question is from Casey Alexander with Compass Point Research. Please go ahead. That last question was my question. So I'll step back in the queue. Thank you.

Operator

Okay. And the next question is from Joe Altobello with Raymond James. Please go ahead.

Speaker 9

Thanks. Hey guys, good afternoon. First question, quick one just to clarify Chip Because I think earlier you said you're expecting golf equipment revenue to be up low single digits and I think just now you said mid to high. So maybe I heard 2 different things. I just want to clarify that.

Speaker 2

Yes, Joe. We're mid to high is the estimate for golf equipment. I'm sorry, low to mid. Low to mid is for golf equipment. If I misspoke earlier, low to mid is the correct number.

Speaker 9

Okay. And in terms of that growth, how much of that is coming from pricing? Obviously with the new ball launch, new club launch this year, etcetera.

Speaker 2

Not much of it from pricing this year. The club side of it is pretty consistent pricing. As mentioned, the irons is at A slightly lower price point than the Paradigm iron, the ball was a higher price point. So it's not a significant move in terms of pricing this year.

Speaker 9

Okay. Thank you.

Operator

The next question is from John Kernan with Cowen. Please go ahead.

Speaker 5

Excellent. Excuse me. Thank you. I guess, Chip, can you talk about the synergies and quantify them a bit more between On course and off course golf and how much those are embedded in your targets as you push into fiscal 2026 and then 2028 as you lay out in The presentation today.

Speaker 2

Sure. The synergies are an ongoing effort, John, that we're unlocking here. And if you look at the journey we've been on, we've clearly added Cost saving synergies with shared costs across the business, we've clearly ramped the growth rate of Topgolf, we've strengthened that overall organization we believe and they're demonstrating some of the results there. And we're really now moving into the more exciting stages from a brand, a digital and a revenue perspective. So we're well ahead of what we've expected to deliver in terms of the operational efficiencies, the cost of capital, if you would, growth rates that we're delivering, sourcing synergies, all of those have been Realized as per our expectation and as shown in the deck and now we're getting our arms around these digital synergies, brand synergies etcetera that we think can drive some significant market share and revenue growth and brand strength over the coming years.

Speaker 5

Got it. Thank you. And maybe Brian, Slide 24 that you have in the deck today, you show the change in leverage ratio, if you were to consider the venue financing rent versus what was now largely considered interest expense. Would you consider changing the way you report? I mean, a 2 turn difference in the Leverage ratio is pretty significant at this point.

Speaker 5

And just move that the interest expense, the venue financing interest expense and consider it rent at this point? There's obviously no principal due on any of the landlord financing. So I'm just it looks like the market is penalizing you for some of the leverage on Would you consider any changes to how this is treated in your reporting?

Speaker 3

We agree with you. We think that is the better way to look at it since there is no bullet or payment at the end. And that's why we tend to focus more on that. Since not everyone's doing that, we're just providing both ways for people to look at it. But I understand your point.

Operator

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

Speaker 7

Hi, thanks for taking my question. Maybe just a follow-up on the revenue synergies. Just in terms of quantifying the revenue and adjusted EBITDA synergies related to those, how should we think about what's kind of behind us in And then what's ahead of us still? And then relatedly, just how should we think about the magnitude of the opportunity related to the CDP intro in the second half of twenty twenty four? Thanks.

Speaker 2

Sure. What's behind us is clearly those synergies that come from cost and Although that will continue, right? All of these investments that we're making both at corporate and at Topgolf provide synergy. When you hear us talking about adding investments in cybersecurity and Workday, other big infrastructure projects, you may allocate those into the corporate side of the business, but those are spread across the entire business and in essence a synergy. Our ability to fund the venues to be able to use Term debt effectively to have a lower cost on term debt that gets extended across the business is a clear synergy that's already in place.

Speaker 2

We've scaled the growth of the Topgolf business and funded initiatives that are clearly bearing The revenue and brand synergies, we're not fully quantifying those yet, but we think they're going to be significant. We talked very Clearly about the reach here, right? This is Topgolf is got More than half of all golfers in the U. S. Will visit Topgolf.

Speaker 2

It is the largest source of new golfers going forward and is continuing scale is larger than off than on course golf. And we obviously have an advantage in reach there that can be very significant going forward. The consumer data platform is going to be very significant for us across are all of our businesses. We've been investing in that across the business over the last year plus. We're going to be having that up and running by the end of the year and it is potentially significant, increasingly significant starting towards the end of this year and going into next year.

Speaker 2

So stay tuned on that, but it is A big and important new project, how you market to consumers and how you approach Consumers and how you engage with consumers. In today's day in world and increasingly in the future is going to be digital. We're going to have a reach advantage in that and some capabilities that others will not have.

Speaker 5

Thank you.

Operator

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

Speaker 2

I want to thank everybody for tuning in today. I apologize, we went a little long. We had a lot of material to cover as you can tell and we're really trying to be best in class in terms of our and data that we present to you. We feel very confident in our venue business. We feel very confident our golf equipment business, the venue business is clearly a long duration and appreciating asset.

Speaker 2

And we presented a lot of data that is new and in support of that. So I invite you to take a look at that in due course. Thank you for your time and we look forward to talking to you at the end of Q1.

Operator

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

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