Leonard Green & Partners, L.P. (EPD) Earnings Call Transcript & Summary

Good day, and welcome to the Topgolf Callaway Brands Company Update. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Katina Metzidakis. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to Topgolf Callaway Brands conference call announcing our agreement to sell a majority stake in its Topgolf business to Leonard Green & Partners. I'm Katina Metzidakis, the company's Vice President of Investor Relations and Corporate Communications. Joining me as speaker on today's call is Chip Brewer, our President and Chief Executive Officer; and Brian Lynch, our Chief Financial and Chief Legal Officer. Earlier today, the company issued a press release announcing its agreement to sell a majority stake in its Topgolf business. The purpose of this call is to address questions related to this agreement. We will not be discussing any intra-quarter trends nor providing any other company updates during this call. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. Please review the safe harbor statements contained in the press release for a more complete description. With that, I would now like to turn the call over to Chip Brewer.

Thank you, Katina. Good morning, everyone, and thank you for joining us today. I'm Chip Brewer, President and CEO of Topgolf Callaway Brands. I'm excited to share some significant news regarding our Topgolf business that will shape our future and optimize value for our shareholders. Today, we announced that Topgolf Callaway Brands has signed a definitive agreement to sell a 60% stake in our Topgolf and Toptracer businesses to Leonard Green & Partners, a renowned private equity firm known for its strategic focus on high-growth consumer companies. This transaction values Topgolf at approximately $1.1 billion and will result in net proceeds of approximately $770 million at closing, subject to standard purchase price adjustments. As we considered various alternatives for Topgolf, including a potential spin-off, we received significant interest from multiple parties. After a thorough evaluation process, we concluded, along with our Board and advisers that this sale was the best outcome for our shareholders as well as our employees and other stakeholders. This transaction will allow us to have a greater strategic focus on our core competencies in golf equipment and active lifestyle as well as improved capital allocation and a simplified structure. We will also retain a 40% equity stake in Topgolf, along with a strategic marketing agreement, which includes continuing as Topgolf's exclusive golf equipment partner. We believe this structure will provide us with significant upside as Topgolf continues on its positive trajectory. Let me take a moment to highlight our partner, Leonard Green & Partners, has a long and proven track record of success in helping high-growth companies like Topgolf reach their full potential. We are confident that Leonard Green is an ideal partner for Topgolf's next chapter, and we're excited to start this new journey together. I'd also like to take a moment to emphasize how proud I am of the Topgolf team. Their dedication and hard work over the past several years has been nothing short of remarkable. Since the merger in 2021, we've accomplished a great deal together. These accomplishments include Topgolf has become a truly national brand, nearly doubling the number of venues, transforming into a clear leader in off-course golf. The team has made significant technology upgrades, including adding Toptracer in all venues, developing an online reservation system and creating new games, all driving strongly positive reaction from Topgolf players. From a financial perspective, venue level margins have increased approximately 400 basis points and with significant future upside as Topgolf continues to expand its digital capabilities. And perhaps most importantly, Topgolf transitioned to become free cash flow positive on a stand-alone company basis in 2023 and continues as such today. Today's announcement is a testament to the strength of the Topgolf brand and the bright future that lies ahead. We are fully committed to collaborating with Leonard Green to further accelerate Topgolf's growth and enhance its financial success. Importantly, this transaction allows us to sharpen our focus on our leading golf equipment business and active lifestyle platform. Post transaction, our remaining brand portfolio will consist of Callaway, Odyssey, TravisMathew and OGIO, which together generated over $2 billion in revenue over the last 12 months through Q3 2025. With the proceeds from this sale, we will be well capitalized, enabling us to continue to reinvest in our core business while also significantly reducing our debt and returning meaningful capital to our shareholders. We will work with our Board of Directors to determine the specifics of this capital allocation strategy as well as the optimal capital structure for our ongoing business. We look forward to providing you with more details of this on our future investor calls. Looking ahead, we expect this transaction to close in the first quarter of 2026, subject to regulatory approvals and customary conditions. Importantly, this deal is not contingent on financing as Leonard Green has already secured the necessary commitments. In conclusion, we're incredibly excited about this next and new chapter for both Topgolf and Topgolf Callaway Brands. We believe this transaction will enhance shareholder value, accelerate growth for both businesses and position us, shareholders, employees and other stakeholders for long-term success. Thank you for your time today, and I look forward to your questions.

[Operator Instructions] Our first question comes from Simeon Gutman with Morgan Stanley.

Congratulations. Chip, my first question is on the minority stake or the equity stake that you're still holding. When you approached this, was that something that you preferred? Or was that mutual? Or was it something that Leonard Green that request or was interested in that you holding an equity stake?

Simeon, it was -- we looked at all options and what was clearly a robust process. And the final version, which we selected in partnership with Leonard Green, we did find it both attractive to have us essentially remain a significant equity partner. because we believe in the future of Topgolf. This transaction in its current form presents speed and certainty as well as significant proceeds and able to participate in the upside. So we viewed it as attractive as did Leonard Green.

And you kind of made some hints at this, but is there anything about the capital structures, not about the use of cash, which you said you'll evaluate, just the capital structures of both of these businesses that you can share, the liabilities for Topgolf, which I assume they go to Topgolf, anything that Callaway will take on its own P&L or balance sheet?

Sure. The basics, and Brian, please jump in and expand on this is the real estate-related financing specific to the venues that goes with Topgolf. The term debt will stay with the RemainCo, which will be Callaway Golf Company at the conclusion of the transaction. But with the proceeds from this transaction as well as our existing, we should have a 0 or minimal net debt position at RemainCo, which we will then evaluate what the right optimal structure is going forward. And at the same time, Simeon, Topgolf will be in a strong capital position as well with limited leverage.

And the next question comes from Anna Glaessgen with B. Riley Securities.

Congrats on the transaction. I guess I'd like to start with the capital priorities post transaction. You spoke to continuing to reinvest, paying down debt. Maybe walk us through how you prioritize kind of capital allocation.

Sure, Anna. Thanks for the question. The reinvesting in our business has always been our #1 priority just to ensure that we remain a leader in our industries, and we'll continue to do that. But I don't -- on the RemainCo side, I don't really foresee much change from what we've been doing. And then after that, we'll just balance between paying down debt, which we plan to do a significant amount of and returning capital to shareholders. And we'll work with -- as Chip mentioned, we'll work with our Board to determine the proper allocation between those two.

And obviously, it's pretty early to get into what Leonard Green is planned strategically, but should we expect a restart of unit expansion kind of getting back to the prior algo? Do you foresee a meaningful shift in the strategic vision? -- anything there?

Anna, you're correct. It's a little premature to go into a lot of detail there, but we've had thorough conversations with Leonard Green on this, and we're both excited about the growth prospects of the business, and it will include a measured amount of unit expansion as well as continuing the initiatives to drive further improvement in same venue sales, which have obviously transitioned over the last several months. We are both excited about accelerating and furthering the growth of Topgolf.

And the next question comes from Joseph Altobello with Raymond James.

I guess first question on the potential synergies for RemainCo as we think about your EBITDA next year.

Joe, is that -- lost the question there.

Potential synergies for RemainCo as we think about your EBITDA for next year?

We -- I guess you're referring to once we separate the businesses, we will have the opportunity to simplify our RemainCo business. And so we are evaluating that. And yes, that is correct. We've talked about that to some level as we've evaluated the separation process, and that's one of the benefits is the more simplified business and the greater overall strategic focus. So that will be part of the benefit to RemainCo because as we've currently reported, as you well know, most of the corporate overhead or all of the corporate overhead has been allocated towards RemainCo in the way we break it out.

And I think in a spin scenario, you were talking about $5 million of synergies. Is that still the right number?

We're not quantifying that at this point. We'll give some more guidance in February.

And the next question comes from Noah Zatzkin with KeyBanc Capital Markets.

I guess just to follow up there. In terms of the strategic vision for RemainCo, any changes there? Anything you could kind of highlight in terms of unlock from the transactions?

Yes. Noah, just return to a very focused business around golf equipment and active lifestyle, which we think will be appealing to specific investors as well as allow the full attention of the corporate team to be on that business, which we also hope will be productive.

This concludes our question-and-answer session. I would like to turn -- we have one more question, George Kelly, ROTH Capital Partners.

Congrats. Just a quick one for me. How much cash is leaving with Topgolf?

Yes. The -- as part of their -- they're going to do some financing as part of this, so they will have ample liquidity going forward. And the cash -- they'll be set up with enough cash, I guess, is a simple answer.

Yes. And the net $770 million that we disclosed, George, would be the net proceeds to RemainCo, net of our estimates for transaction fees, expenses and working capital adjustments. So we gave you our best estimate of the net proceeds to Callaway, Topgolf's capital structure is not something we're going to disclose, but we're very comfortable with what the position they're going to be in, modest leverage and a strong position to continue to grow that business.

Understood. I'm just trying to understand of your Q3 ended cash, just using that as a sort of proxy, is a lot of that cash sitting at Topgolf and will stay there? Or it sounds like you're saying not a lot of cash is leaving. They have their own financing and cash commitments. So your cash balance is what it is.

They have their own financing. The cash for RemainCo is at RemainCo, and we'll continue to have that. Now we're a little bit seasonality, but I think the cash at Q3 is a decent estimate.

Yes. That's our starting point, George. We'll do whatever we do from a normal operating basis in Q4. But there's no transfer of cash to Topgolf.

[Operator Instructions] Our next question comes from Casey Alexander with Compass Point.

I'm just curious, Leonard Green owns a stock position in Topgolf Callaway. I do they -- as a part of the way that the deal is structured, are they going to surrender those shares back to Callaway as a part of the consideration? Or are they going to continue to hold those shares?

Those shares are not part of the transaction, Callaway -- I mean, Casey and what they do with them is really their call. We can't speak for them, but it's not part of the transaction at all.

Our next question comes from Arpine Kocharyan with UBS.

I was wondering if you could maybe, as a closing, go over the strategic rationale of doing this sale versus consideration of a tax-free spin-off. Anything during the due diligence process that you would like us to sort of know or be aware of in more detail on your thought -- to understand a little bit more your thought process of choosing the sale versus, let's say, a tax-free spin-off.

We were -- obviously, this was a very thorough process. We evaluated multiple options, including a tax-free spin-off. The among other reasons, we chose this option because of speed and certainty that it provides, significant cash proceeds as well as the ability to participate in the upside that we view for the future of Topgolf. So it really, from our perspective, combined several unique factors that made it ideal for creating shareholder value.

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

Well, thank you, everybody, for dialing in early this morning. We appreciate it. We're, needless to say, excited about this transaction and its potential value unlock for our shareholders. We look forward to updating you further on this as well as our business in general on our Q4 call, which will be in February. Thank you so much. Have a great day.

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