MODG - NYSE

Good day and welcome to the Q2 2022 Callaway Golf Company Earnings Call. Today's conference is being recorded. At this time, I would now like to turn the conference over to Patrick Burke, Senior Vice President of Global Finance. Please go ahead.

Thank you, Justin, and good afternoon everyone. Welcome to Callaway’s second quarter 2022 earnings conference call. I’m Patrick Burke, the Company’s SVP of Global Finance. Joining me as speakers on today’s call are Chip Brewer, our President and Chief Executive Officer; and Brian Lynch, our Chief Financial Officer. Jennifer Thomas, our Chief Accounting Officer is also in the room today for Q&A. Earlier today the company issued a press release announcing its second quarter 2022 financial results. In addition, there is a presentation that accompanies today’s prepared remarks and may make it easier for you to follow the call. This 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. In the instances where we report non-GAAP measures, we have reconciled the non-GAAP measures to the corresponding GAAP measures at the back of the presentation 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 Chip Brewer.

Thank you, Patrick. Good afternoon to everyone on our call and thank you for joining us. I'm pleased to report strong second quarter results driven by the continued strength of all three of our business segments. Total net revenue was just over $1.1 billion, up 22% year-over-year. Flow through to the bottom-line was strong as well with adjusted EBITDA of $207 million, up 26% on a reported basis. These results clearly show continued momentum across all of our business portfolio and leave us in a position of strength as we look to the full year and the long-term. Shifting to our segment overview, I'll first start with Topgolf second quarter results. The Topgolf team put up another outstanding quarter with same-venue sales up approximately 8% versus 2019, consistent with the expectations we provided last quarter. We continue to experience overall strong demand, some of which is offset by staffing challenges that continue to impact us and as we understand it, the entire restaurant and service industry. Looking forward, we believe our same-venue sales projection for the balance of the year will be positive, mid to high single-digits versus 2019. This would put our full year same-venue sales up mid to high single-digits consistent with our previous guidance. Like most other businesses, we're seeing continued inflationary pressures across all inputs, including wages and cost of goods. To offset this, we're taking low to mid-single-digit price increases during this quarter and we will also be raising select hourly wage rates to make sure we remain competitive and that our hourly playmakers are well taken care of. Based on everything we've seen so far, we believe the price increases we'll be able to offset the inflationary pressures without negatively impacting usable demand. We saw no fall-off in demand when we took a similar amount of price at the end of last year, and we continue to see excellent demand for the Topgolf experience. Our price increases are also modest, relative to others we're hearing about in the market. New venue openings remained on track in the second quarter and continue to open well. During Q2, we opened two new owned and operated venues, one in Philadelphia, and one at the previously mentioned El Segundo, California location. Also, just last week, we opened our newest venue format in the Seattle Metropolitan area. This is the first of a new venue format that benefits from a larger more open lobby area that includes golf simulators. This venue format, which we'll use in select markets going forward, will add to our cross brand synergy strategy by including a Callaway branded fitting studio in the lobby. Looking forward, we plan to open one additional venue in Q3 for a total of two in the quarter. The fourth quarter will then be our largest quarter for openings with six now planned for that quarter. This will deliver 11 new owned and operated plus to franchise international venues for the full year, the most in our history and another sign of strong performance. Eight of the owned and operated venues will open in the second half of this year, an impressive accomplishment, but also one that will lead to lower operating margins in the second half, mostly in Q4 due to the pre-opening expenses associated with these openings. Our pipeline for future venues remain strong and is developing according to plan. During Q4, we will also be phasing in a healthier level of marketing investment highlighted by an exciting new campaigns aimed at both brand building and driving long-term volume. We view this as a valuable investment into the long-term health of our business. And I look forward to sharing the new campaign with you later this year. As discussed at the Investor Day, Artie and the team have also started to implement new digital reservation technology at the venues. To further improve long-term efficiencies, our operating margins have been excellent year-to-date, and we remain highly confident in our ability to deliver against our stated venue profitability goals both for this full year and long-term. Turning the Toptracer business, we installed 2,065 bays in the quarter, a new record for us. And we remain on track for 8,000 or more bays this year. Feedback on the product and demand both remain strong. As evidenced by our Q2 results, we're also making nice progress in ramping our installation capacity. In the media business as discussed at our Investor Day earlier this year, we're working on another mobile game, which we expect to launch later this year. While we're currently hesitant to forecast meaningful financial impact from this project, we are excited about it and it's an excellent example of how we plan to leverage our content creation capabilities across all of our various platforms. Before I continue to our other business segments, I want to highlight that our ability to continue to put up quarter-after-quarter of strong results furthers our confidence in the success of this business in the long-term outlook presented at our Investor Day. If some investors initially look at the Topgolf business as either risky or unproven, I believe the string of consistent results since our merger should soon begin to change perspectives and valuations As we look out over the next few years, we are confident Topgolf will be a significant source of long-term value creation. Already in 2022, it is forecast to be our largest segment by revenue and even with the strong growth forecast across our other business segments, this segment alone is expected to account for more than half of our total adjusted EBITDA by 2025. Topgolf is the keystone of our modern golf thesis. It already is a dominant leader in the dynamic off-course golf industry and we believe it will maintain this position given its significant growth prospects ahead. And in our forward guidance, I'm sure you'll notice that we're once again increasing our projected full year EBITDA for this exciting segment of our business. Moving to Golf Equipment, the business had another excellent quarter with revenue exceeding expectations, up 13% year-over-year. We now expect this segment to be up 12% or more for the full year and increase from the approximately 10% we said previously, as demand continues to remain strong in the key U.S. and Asia markets, supply chain restrictions have abated, and we're having strong market share performance. In Q2, we also benefited by supplying the launch of our new drawers Jaws Raw wedge slightly earlier than planned. According to Datatech in the U.S., despite comparatively poor weather conditions this year, second quarter hard goods sell-through was down just 2% versus 2021 and remained up 37% over 2019. Outside the U.S. market conditions vary during the quarter, Japan was up 5% and Korea was up 11%. While the U.K. and Europe were both down approximately 10%. Overall, we are pleased with the market conditions and continue to see the avid golf consumer as healthy and engaged. We've also been very pleased with the performance of our 2022 products with sell-through trends and overall market shares increasing as the year progresses, especially for our Rogue ST drivers and Fairway Woods, as well as our Chrome Soft golf balls. We finished the second quarter as the number one hard goods brand in the U.S. and delivered U.S. golf ball market share of 20.7% year-to-date. Both of these are record results. To offset inflationary pressure. We have raised prices nicely this year. And as the AVID golf consumers both affluent and passionate, there's been no discernible push back. With continued innovation we expect to be able to continue to offset inflationary pressures in this manner. On the manufacturing side, supply chain pressures are easing and our supply chain is continuing to perform well, despite periodic COVID flare ups are other challenges. We expect it to continue to be a source of relative strength going forward In the first half of 2022 like other OEMs, we also benefited from an overall inventory catch up at retail. We now believe trade inventory levels have largely normalized to appropriate levels, neither too high nor too low in our opinion. Lastly, the active lifestyle segment had a strong quarter with positive momentum across all our brands. Revenues for this segment increased 39% versus second quarter last year. The Callaway branded business in this segment remain strong globally, with our apparel business in Asia performing well and our Gear business, namely golf bags and gloves delivering both market share and revenue increases. Meanwhile, TravisMathew had another outstanding quarter, continuing the strong brand momentum and delivering strong double-digit growth across all channels. This business remains on track to deliver approximately $300 million in revenue this year and $50 million or more in adjusted EBITDA. TravisMathew opened three new stores in the second quarter, including our first two stores in New England, and one in Ohio. The brand continues to prove itself in all US markets, and is also beginning to gain a foothold internationally. Also during the quarter, we had one of the most exciting product launches in TravisMathew history, the TravisMathew Women's. While this launch is preliminary collection and not a major source of revenue to-date, we're both confident and excited about the opportunity here. Particularly given that women account for over 25% of the purchases made through TravisMathew direct-to-consumer channels. Throughout this year, we plan to continue to test and collect feedback there'll be used in product development and brand direction for our 2023 women's collections. The Jack Wolfskin business continues to make good progress and showed double-digit revenue growth for the quarter, despite difficult macroeconomic conditions in both China and Europe, our overall brand strength and pre-books continue to build momentum. We believe this brand is on strong footing and positioned for growth, even with the challenges presented via current and anticipated macroeconomic and FX headwinds in Europe. When looking at the active lifestyle segment on the whole, we're on track to deliver approximately $1 billion in net sales for the fiscal year, no change from our previous forecast. Turning back to the consolidated business. While I don't want to talk too much about risks because our business is best defined by the vast opportunities in front of us, and that's what energizes us and will drive significant value. We are a growth company and we're proving ourselves here quarter-after-quarter. However, given the nature of today's uncertain environment, and my perception of the investor community's understandable concerns here, I'd like to spend a brief moment giving my perspective on how the current macroeconomic risks may impact us. Earlier this year, there was a lot of concern about a reversion in golf consumption. Clearly, halfway through the year, the data shows there has been no reversion. Perhaps a small reversion will come at some point, and perhaps it will not. However, I can see no evidence of one so far, especially with avid golfers. And if it there is a reversion I for one would expect it to be modest. Inflation has been an issue for us as it is for most companies. But across all of our business segments, the data thus far shows we can take price to largely offset it. A recession-driven pullback and consumer spending is an ongoing risk. But we also have strong momentum in our business segments and based on historical data that we have. Our segments overall are not highly sensitive to a mild recession. FX is a real headwind for us as it is for all global companies. If rates stay where they are currently, they will have a short-term impact. However, we have managed through large FX movements before and we'll be able to do so again now. I did not anticipating having a long-term impact. I believe it's best to focus on the data and history. These points to the conclusion that we present less risk than most businesses and that our growth is more reliable. Given is driven by new venue openings, brands that have significant momentum, and our concentration in a healthy growing business segments where consumers are both well off and passionate. In conclusion with the continued strength we're seeing across our businesses, we are taking up our full year financial guidance. We're specifically increasing a full year forecast for both Topgolf and the Golf Equipment business. Consumer demand remains strong in all our primary segments and our primary consumers appear to remain passionate, healthy, and engaged. We're increasingly confident that we're on track to achieve the long-term goals outlined at our Investor Day earlier this year. We're in fact ahead of plan so far, and that we're well-positioned to positively work through the current macroeconomic climate. And with that, I'll hand the call over to Brian to discuss our financials and outlook in more detail.

Thank you, Chip and good afternoon everyone. As Chip mentioned, we are very pleased with our second quarter results, which were very strong. It is those results along with improved supply chain conditions, our ability to take pricing to offset inflationary pressures and our continued strong momentum in each of our operating segments, that gives us the confidence to increase our full year guidance today. Before discussing our revised guidance in more detail, I will first cover our second quarter results. For the second quarter consolidated net revenues was $1.12 billion, an increase of 22% compared to Q2 2021. Changes in foreign currency rates had a negative $38.6 million impact on second quarter 2022 net revenue compared to the same period in 2021. Looking at our segment performance Topgolf contributed $404 million in revenue in the quarter, a 24% increase over 2021 and reported same-venue sales growth of 7.9% compared to 2019. The strong same-venue sales performance in the quarter was driven by strong social and corporate events, with a corporate events business showing its first quarter of positive, same-venue sales since the pandemic began. Golf Equipment had another excellent quarter, generating $452 million in revenue, a 13% increase over Q2 2021, driven by the continued high demand, strong market shares, and improve supply in Golf Equipment, which allowed for an inventory catch up at retail. Lastly, our active lifestyle segment had revenue of $260 million, with each of the four active lifestyle brands up double-digits versus Q2 2021. Total non-GAAP costs and expenses were $981 million in the second quarter of 2022 compared to $796 million in the second quarter of 2021. The increase was driven by increased variable expenses in our operating segments as well as increased corporate support, increased freight costs, and other inflationary pressures. Second quarter 2022 non-GAAP operating income was $135.1 million, up $17.1 million year-over-year, a 14.5% increase. Continued strong demand along with the pricing and other business improvements we implemented this year have allowed us to outrun the increased operational expenses we are experiencing. While changes in foreign currency exchange rates had an unfavorable impact on operating margins, on a constant currency basis, non-GAAP operating margins increased 40 basis points in the second quarter of 2022 compared to the prior period. Moving back down the income statement, non-GAAP other expense was $19.5 million in the second quarter of 2022 compared to $27 million in Q2 2021. This improvement is primarily due to an increase in gains on foreign currency contracts in the second quarter of 2022, partially offset by higher interest expense. Non-GAAP earnings per share was $0.47 on approximately 201 million shares, compared to $0.36 cents per share on approximately 194 million shares in the second quarter of 2021. The increased share count is primarily related to an accounting change that took effect on January 1st, 2022, which requires that we include 14.7 million shares related to the assumed conversion of the company's convertible notes. I want to remind you that applicable accounting rules do not give any effect to our cap call in calculating EPS, but upon settlement, it should reduce the actual number of shares we are required to deliver by approximately 3 million to 5 million shares depending on stock price. Lastly, Q2 adjusted EBITDA was $207 million, up $43 million or 26% over Q2 2021 and our EBITDA margins improved to 18.6% compared to 18% for the same period last year. Turning to certain balance sheet items. We remain in a strong financial position with ample liquidity. As of June 30th, 2022, available liquidity which is comprised of cash on hand and availability under our credit facilities was $640 million compared to $877 million at June 30th, 2021. The decrease from last year was due to planned working capital increases in the Golf Equipment and active lifestyle businesses to support growth as well as continued investment in Topgolf venues. The $640 million of availability was an increase from the end of Q1 when we had $576 million of availability. As a reminder, we expect Topgolf will be approximately self-funding in 2023 and cash generating in 2024. At quarter end, we had total net debt of $1.7 billion, including venue financing obligations of approximately $670 million related to the development of Topgolf venues and including the convertible debt of approximately $259 million. Our net debt leverage ratio was approximately 3.2 times at June 30th, 2022 compared to 2.9 times to June 30th, 2021. Our leverage ratio on a funded debt basis was below 2.0 times. Consolidated net accounts receivable is $376 million as of June 30th, 2022 compared to $325 million at the end of the second quarter of 2021. The increase was primarily due to the increase in revenue. The quality of the accounts receivable remains strong. Our inventory balance increased to $604 million at the end of the second quarter of 2022 compared to $534 million at the end of the fourth quarter 2021 and compared to $335 million at June 30th, 2022 -- I mean, excuse me, 2021. The increase in inventory primarily relates to being under inventoried in the prior periods due to the supply chain disruptions we experienced last year. Inventory turns and days inventory in hand are consistent with pre-pandemic levels. We feel very good about the quality of our inventory. As you can imagine, when we were very short on inventory over the last two years during the pandemic, we sold whatever was available and therefore, cleaned up any old inventory. Capital expenditures for the first half 2022 were $154 million, net of reimbursements. This includes $120 million related to Topgolf. For the full year, we expect total CapEx of approximately $325 million, net of reimbursement including approximately $250 million for Topgolf and $75 million for the non-Topgolf business. Now turning to our balance of the year outlook. We are revising our full year 2022 revenue expectations to $3.945 billion to $3.970 billion compared to previous guidance of $3.935 billion to $3.970 billion. Changes in foreign currency rates are estimated to have a negative impact of $129 million for the full year. This estimate assumes 12% or more revenue growth for the Golf Equipment segment for the full year, which is up from the prior estimate of 10% growth. The guidance also assumes approximately $1.56 billion in revenue for Topgolf this year consistent with previous guidance, and approximately $1 billion in revenue from the active lifestyle segment, which is also consistent with previous guidance. Our full year adjusted EBITDA forecasts also increased and is now projected to be $555 million to $565 million, which assumes approximately $235 million to $245 million from Topgolf. At midpoint this represents a $15 million increase from the previous guidance, primarily due to increases in both the Golf Equipment and Topgolf segments. For the full year 2022, adjusted EBITDA is expected to increase over $100 million compared to 2021. For the second half, we estimate revenue to be within the range of $1.79 billion to $1.15 billion, which includes an estimate of $69 million of negative foreign currency impact. We expect the Topgolf cost segment to be approximately 25% driven by same-venue sales in the mid to high single-digits, and by additional venues with two opening in Q3 and six opening in Q4. We expect the Golf Equipment segment to be up low to mid-single-digits and the active lifestyle segment to be up mid-teens for the second half of the year. In total, second half revenues are expected to increase by approximately 15% compared to the second half of 2021. The company currently estimated its second half 2022 adjusted EBITDA will be within the range of $178 million to $188 million versus $153 million in the second half of 2021. This represents an approximate 20% increase. Our business has become increasingly difficult to forecast on a quarterly basis, as many factors can cause a shift between quarters including new product launch timing, marketing campaign timing, weather, timing of venue openings, and timing of supply shipments to name a few. With that said, we are providing some guidance on Q3 and Q4, but please recognize that the results could shift between those quarters. Total company third quarter 2022 net revenue is estimated to be between $940 million and $955 million versus Q3 2021 net revenues of $856 million. This assumes $42 million of negative foreign currency impact for the third quarter of 2022 compared to 2021. Given the second half launch timing of Golf Equipment products in 2022 versus 2021, we expect Golf Equipment will be down mid to high single-digits for the third quarter, but is expected increase double-digits in the fourth quarter, resulting in 12% or more growth for the full year. The Topgolf and active lifestyle segments are expected to grow double-digits in both the third and fourth quarters. In total, third quarter 2022 revenue is estimated to grow approximately 11% compared to 2021. Given foreign exchange headwinds and difference in product launch timing compared to 2021, we expect 2022 adjusted EBITDA will decrease in the third quarter, but increase in the fourth quarter. Third quarter adjusted EBITDA is estimated to be between $122 million and $132 million versus $139 million for the same period in 2021. We expected adjusted EBITDA will increase by approximately $40 million in the fourth quarter compared to 2021, resulting in an overall increase of 19% for the second half of 2022. In summary, we've had a great start to the year and are optimistic at the balance about the balance of the year. While we are not immune from foreign currency and inflationary pressures this year, we believe we can continue to manage them. Each of our operating segments are performing well and enjoying strong brand momentum. Consumer interest in demand remains strong across our businesses, giving us the confidence to increase our full year guidance despite the macro economic challenges. Looking even further ahead, we will have some headwinds in 2023. Foreign currency rates are expected to continue to be a headwind and the hedge gains we have this year are not expected to repeat. We will also not have the benefit of the channel fill in the Golf Equipment business that we had this year, as retail inventory is generally back to normal levels. With that said, we believe we will continue to benefit next year from new Topgolf venues, as well as continued strong consumer desire for leisure and entertainment such as Topgolf, hiking, golf, and other outdoor activities. We are fortunate that our consumers are generally well off and passionate. As a result we expect to grow in 2023, despite the current macroeconomic headwinds. In addition, we expect to benefit from the additional pricing and other actions we plan to implement and we expect freight expense to abate somewhat in 2023. Overall, we were optimistic about next year and are confident in our ability to create shareholder value over the long-term. That concludes our prepared remarks today and we will now open the call for questions. Operator over to you.

Thank you. [Operator Instructions] And we'll go ahead and take the first question.

Hi, this is Alex Perry from Bank of America. Thanks for taking my questions and congrats on a strong quarter here. Just first I wanted to ask on sort of what led you to take off the guidance on the Golf Equipment side? Is it that the POS is playing out better than you expected? And then just maybe offset can you give us a bit more color on the launch timing shifts? And how that’s sort of impacting 3Q versus 4Q? Thank you.

Sure, Alex. Our confidence in the Golf Equipment business is based on the strong results we've seen thus far, and really over an extended period of time. We're very pleased with how the markets are in total and they're continuing to show a very engaged consumer. And we are gaining market share as the year progresses. So if you could track the market share of whatever measure you would look at in our key markets -- in all of our Golf Equipment categories really, we're seeing continued and increasing strength as the year goes on. So, feel very good about that. And happy to be able to take up our expectations for the full year to what I think are very strong numbers. Then on the timing issue in Q3 that is -- there's some FX in there that of course, weighs heavily on all results. But it's also just short-term launch timing. As I mentioned in my comments, we pulled forward because of our great supply chain performance, a little bit of the Jaws raw, which is our new wedge launch into Q2. We had not originally planned for that to be in Q2, but we had the ability to ship a good portion of that launch in the quarter. So, we took advantage of that. And we really don't have any significant launches in the quarter for this year, but last year, we had some reasonably substantial launches particularly a product in Asia that was a significant one for them, and that will not repeat. I think it's worth noting that that's just timing because the half is up in all measures including Golf Equipment.

Perfect. That's really helpful. And then just my next question, maybe could you just give us a little more color on the outlook for Topgolf? And I guess, maybe just on that, could you maybe give us a little more color on sort of the monthly cadence of the Topgolf comps? I think you said that, March exit rate was up 10% in same venue sales when you reported last quarter. Has there been any sort of deceleration that you've seen at all? And then just on the outlook there. You sort of took up the adjusted EBITDA guidance on a similar same venue sales outlook. Could you just maybe give us some color on what's driving that?

The -- so monthly cadence, I'm not going to get into too much detail on monthly cadence. As you can tell, we had an excellent quarter with same venue sales up 8%. We're continuing to see strong demand at Topgolf, there's always small variations on a month-to-month basis, but the trends have been quite strong, continuing strong. We've got great demand for that product. And we feel very confident and pleased with that. So nothing to speak of on a monthly basis other than continued momentum and probably building capabilities there as we go forward because the events business has been actually strong. And on the EBITDA basis, what we're seeing is some strong operating margins there, exceeding what we had originally expected. We are labor constrained there. So that is even moderating the overall same venue sales. They would be higher if we had more labor available, but the operating margins are driving the increased EBITDA results, and there's really strong performance across the business.

Perfect. Thanks a lot. Best of luck going forward.

And we'll go ahead and take the next question.

Hey, guys. Good afternoon. It's Joe Altobello from Raymond James. Appreciate the question. I guess first question on Topgolf, the same venue sales number. Could you kind of parse out how much of that is ticket versus traffic?

Sure. So the same venue sales at Topgolf growth, it's a mix, as you would expect, through the first half of the year was about 70% price and 30% volume. And -- but the volume was constrained, as I mentioned. So we believe it would have been more of an equal balance and if it was unconstrained. We continue to have excellent demand.

Got it. And maybe just to follow-up to that. The Analyst Day wasn't that much ago. But in terms of 4-wall economics for the Topgolf venues has that changed at all given the new interest rate environment that we're in today?

I'm sorry, can you repeat the question? Was it the 4-wall profitability or what was the --

Yes, given the interest rates have risen over the last couple of months here, I'm curious how the four-wall economics for your --

No, there's been no change, because our -- we have not -- as we mentioned at the Investor Day, there's been no change in the cap rates in our REIT financing. Those are, a, locked in, in advance. But as the business continues to strengthen, we have not had any increase in the cost of the REIT debt. So no impact.

Okay. Great. Thanks, appreciate it.

Thank you. We'll go ahead and take another question.

Hey, good afternoon, guys. Daniel Imbro from Stephens. Thanks for taking our questions. I want to start on a comment you made. I think during your prepared remarks, you mentioned you're expecting some higher advertising costs in the back half of the year. Was that comment specific to Topgolf or across your other categories? And kind of what's your outlook? I mean, Brian mentioned inventories are a bit more normal. What's your outlook for promotions across different product categories as you look over the back half of the year?

Sure, Dan. The comment on the increased marketing was Topgolf-specific. We have not been doing a significant amount of market. In fact, we've probably been under marketing relative to historical metrics in the business. And we will be increasing that marketing spend to a more sustainable level with a new program that we're really excited about starting in Q4. And that, I think, is a very important and very valuable long-term investment in that business. The -- so that one specifically was Topgolf. And then in promotional outlook or experience really globally, we're not seeing much promotional activity and my guess is that we won't see a lot this year, maybe more than last year because inventories have returned to healthier levels. But certainly, I would expect less than historical, and I am not expecting it to be very promotional at all really.

Great. That's helpful. And then, Brian, for my follow-up. Just looking at the segment profitability, it does look like Golf Equipment pre-tax margin stepped down a bit despite the pretty strong 13% year-over-year growth. Was there anything onetime embedded in that segment margin or what were the primary drivers of that decline on a segment basis?

For the Golf, it's primarily the freight expense, which for the Q2 and the first half and then FX. So those are probably the two biggest drivers.

Yes. Without that, we would have been up there. And some of that's just geography because of the FX, the hedge gains.

I would expect to be up second half for that. So the freight gets better, less headwinds because it ramped in 2021 and the FX should subside a little bit, but it will still be there.

Good. Thanks a lot, guys.

And we'll go ahead and take another question.

Hi, Kevin Heenan from JPMorgan. Thanks for taking the question. I just wanted to ask about the club business within the Golf Equipment and how you've seen the market share trend throughout the year as fittings have increased? And then secondarily, what do you attribute the market share gains to on the ball side and how you see the sustainability of that trend going forward? Thanks.

Sure. Kevin, the market share on the club side has really ramped during the year as the product got out to retail and the more fittings, more launch pioneer testing that went into play, the better we have done. And we're at record market shares in many categories and really surging in that area. So I think it's clearly a testament to the quality of the product. And on the ball side, we have great market share. Obviously, we're record shares, but you've seen a trend really that goes all the way back to 2013 of consistent market share gains and growth in our golf ball business. We have a differentiated product and a strengthening brand. We have a strong distribution network. And it's not like this change is a Johnny come lately scenario. This has been an ongoing long-term trend of market share gains that just happens to be continuing as we would hope it would.

Great. And if I could just ask one follow-up on the Topgolf business, I guess, how does that customer profile look maybe by average income? And then have you seen any impact to date either on spend per visit or trips tied to the inflationary pressures in the market? And maybe just how to think about kind of the expense structure there if there were to be a downturn?

Kevin, we have not seen any pullback in demand. Just the opposite, we are seeing strong demand, and we're long waits, we're not able to satiate all the demand. So, continued strength in that business, the consumer is a young consumer, engaged consumer. They're -- it's right in the wheelhouse of some really -- trends that -- people getting out and enjoying the social activities. It's almost an affordable experience that you do one to two times a year for majority of the consumers. So it's not something that, will, I think be that susceptible to changes in trend if there's a mild recession. And the consumer there is also reasonably well off, not as well off as the golf consumer, but 90,000 to 100,000 average income. And we can just tell you what we see so far. And so far, excellent demand was strong trends.

And on the contingency side, I think if there's a downturn you saw during the pandemic was a great example of that, they're able to adapt incurred costs and preserve cash significantly, I think they cut CapEx by well over $100 million when they needed to. So there's a lot of flexibility in that model.

Great. Thanks so much, guys.

Thank you. And we'll take another question.

Hi. Brett Andress from KeyBanc. I think you said channel inventories were normalized, Chip. And I think there was some slightly different commentary maybe from [indiscernible] today. So could you just maybe elaborate a little more on where your channel inventories are versus 2019, weeks on hand, however you want to frame that up, and maybe specifically what they look like here in the US and then internationally?

Sure, Brett. I can speak with some accuracy relative to the US and just generally internationally. But if you look at the total US market, the months on hand, in clubs of inventory is 3.4 months versus 3.7 to 3.8 in 2018 and 2019. So, still a little lower in general than 2018, 2019, but the market is significantly bigger. So the absolute values are larger. And that's why I say it's relatively normalized in a positive perspective. Our inventory is 3.1 months, so lower than the overall and in the club side roughly consistent with what it was in those previous periods. So our supply chain has done an excellent job of creating an advantage for us. And our results show that and we're in a strong position going forward. I also want to say, Brett, there's obviously a lot of focus on inventory, both internally and externally. Our partners are very attentive to it. We are very attentive to it. The possibility or the probability of us being surprised on inventory getting out of hand is remarkably low without a black swan event. We're tracking sell-through an inventory levels on a daily to weekly basis across categories, et cetera. So very much on top of it, and what you see in our numbers is just the result of excellent supply chain performance. And I think the numbers speak for themselves in terms of where everything ended up.

Got it. That's helpful. And then this, I don't know if this is a stupid question or not, but do you see any impacts to the broader health of the sport or your business here from winter between the PGA Tour and the [indiscernible] [4:01] Tour? I guess, whether that's how you allocate tour spend, whether it's just the total eyeballs on the sport, just any high level thoughts there's or it's just noise?

Yes. We're not sure how to think about that at this point. Clearly, getting a lot of attention and it’s an interesting and important aspect for golf, whether live ends up being a good thing or a bad thing is to be determined. And we're in a wait and see approach at this point on that. I don't think at this point, it has a specific impact upon us as an equipment manufacturer or as a brand. But certainly a topic of a lot of conversation debate around the game of golf and in fact, it might even be giving golf a little added up PR and conversation value. I haven't seen golf in the Wall Street Journal and in so many commentaries in a long time.

That's a fair point. Thank you.

And we'll go ahead and take the next question.

Hi, good evening. It's Susan Anderson from B. Riley. I was wondering if maybe you could talk a little bit about the apparel business. It sounds like TravisMathew continued very strong growth. Maybe if you could talk about the Callaway brand. And then also, Jack, and I'm curious how that performance is doing. I know, it's still pretty tough in China, and then also over in Europe? Thanks.

Sure, Susan. You're exactly right, TravisMathew continues to kill it, that business has such outstanding momentum. And strong double-digit growth across all channels, proving itself in all markets and starting to get established internationally, et cetera. So couldn't be more bullish on that. We -- one of the big initiatives over the last year was starting an apparel business in Korea, that has gotten off to a very positive start. Our overall business in Korea remains strong and is now growing significantly. And so we're very pleased with that initiative. And turning to Jack Wolfskin, you would have thought they would have been a conversation topic of some note on the call, given their presence in China, and in Europe, where the macro economic climate is as difficult as it is anywhere in the world. But they haven't been. They delivered strong growth overall in the quarter even currency neutral. You'll notice we haven't been reporting all of our numbers currency adjusted, because all of them would be significantly higher. But they numbers speak for themselves. And the pre-books at Jack also remain very positive. So we do expect that market environment to be challenging, certainly through the end of the year, probably next year. But the team's done a wonderful job and continuing to develop and grow that business of brand momentum feels good. And the pre-books look good.

Great. Sounds positive. And then if I could just follow-up on your capital allocation strategy. I think there was on the slide, there was the priority of opportunistically explore investments. So just curious your thoughts around acquisitions, you feel like you're in a spot to make another acquisition? And if so, could you give some thoughts around what you would be looking for to complement the business?

Hi, Susan. This is, Brian.

Hi, Brian.

The good news is we don't have to do any acquisitions. We have a lot of embedded growth with our current business and a lot to unlock. Our priority has always been to invest back into our business. And then in this -- particularly this environment, we're focused on maintaining reasonable leverage ratios. But after that, we'll balance between investing in other areas and returning capital to shareholders. But I don't -- there's no burning desire. We don't have to, we'll be opportunistic.

Great. That's helpful. Thanks so much. Good luck the rest of the year.

Thank you.

And that does conclude the question-and-answer session. I'll now turn the conference back over to Mr. Chip Brewer.

Well, thanks -- I just like to thank everybody for tuning in. We really appreciate your interest in Callaway Golf. Wish you a great conclusion to your summer, and we look forward to engaging with you again throughout the year and certainly on the next earnings call.