Topgolf Callaway Brands Corp (MODG) 2002 Q4 法說會逐字稿

Good afternoon.

My name is Latricia (ph) and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Callaway Golf fourth quarter fiscal year 2002 results conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star then the number one on your telephone keypad.

If you would like to withdraw your question, press the pound key.

I will now turn the call over to Mr. Brad Holiday, Chief Financial Officer of Callaway Golf.

Sir, you may begin your conference.

Thank you and welcome everyone to Callaway Golf Company's fourth quarter and fiscal year 2002 conference call.

I am Brad Holiday, Executive Vice President and Chief Financial Officer of Callaway Golf Company.

Joining me today is Ron Drapeau, Chairman, President and Chief Executive Office of Callaway Golf Company.

During today's conference call, Ron will provide a brief overview of our 2002 results and current trends.

I will provide more detailed comments about our financial results and Ron will then conclude our prepared remarks with some thoughts on Callaway Golf Company in 2003.

We will then open the call for questions.

Before we begin, I would like to point out that any comments made about future performance, events or circumstances including estimates of sales and earnings per share information for 2003 and beyond, as well as statements concerning the reversal of energy contract charge, the elimination of golf ball losses and projected depreciation and amortization expenses, capital expenditures and obsolete inventory are forward-looking statements subject to safe harbor protection under the Federal Securities laws.

Such statements reflect our best judgment today based on current market trends and conditions and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected in the forward-looking statements.

For details concerning these and other risks and uncertainties, you should consult our most recent form 10Q filed with the SEC, as well as the company's other reports subsequently filed with the SEC from time to time.

With that, I will turn the call over to Ron.

Thanks Brad, and thanks to everyone for joining us today.

Our company's faced many challenges in 2002, which we met head on.

The challenges are well understood, soft economies in both the United States and Japan, increased lay offs in the United States, a meltdown in personal net worth, a continuing decline in the number of rounds played in the United States and mixed messages from the United States Golf Association regarding the rules around COR and club head size and club length.

All of these factors led to price discounting, particularly in metal woods and balls as competitors including ourselves fought for share.

Despite these many challenges, Callaway Golf was able to achieve sales of $792 million, a decline of three percent versus 2001 and maintained its leading market share in woods, irons and putters in the United States market according to Golf Datatech.

On this revenue base, we reported a $1.03 in earnings per share versus 82 cents in 2001.

Both the revenue and earnings results for the year was better than our guidance provided in September of 2002, which we confirmed in our third quarter release in October and last updated in December.

WE are pleased that we matched and even exceeded slightly our guidance through these uncertain times.

We will continue to announce our expectations as clearly as we can see them, and we will continue to work hard to achieve them.

Looking at our global markets, we achieved record sales in Europe, Canada and Australia this year.

In the United States and Korea, we were basically flat compared to last year.

On the other hand, Japan and the rest of Asia were down accounting for our year over year decline.

Earnings were positively affected by the reduction in our warranty reserve that Brad will discuss in depth along with other details of our financial reporting.

On a pro forma apples to apples operating basis, our pre-tax earnings declined from a year ago by $23 million due primarily to $8 million of additional losses in our golf ball business and another $9 million from inventory evaluation provisions on C4 and ERC2.

As I have stated in the past, we are addressing the golf ball losses with the plan that we will eliminate the losses from this segment by 2004.

We are deep into our evaluation of available options, although we cannot comment on any final actions at this time.

The obsolete driver inventory we wrote down in 2002 was driven by two factors.

First, the ERC2 inventory would have liquidated, in our opinion, if the United States Golf Association had not reversed its own proposal to relax COR restrictions in the United States beginning in 2003.

This reversal of position by the United States Golf Association was the final nail in the coffin of that terrific product as far as United States sales were concerned.

The C4 inventory was a market mess.

While the C4 incorporated breakthrough technology in terms of weighting and resulting forgiveness, it was not accepted by consumers due in large part to the muffled sound at impact.

Moreover, with all the turmoil in the driver marketplace in 2002 including the actions by the ruling bodies and the price cutting by mainstream competitors, it was a difficult time to introduce a new, premium priced technology.

Early season selling was strong and we kept production levels up longer than the rest of the season justified.

But this was a miss and we have faced up to the fact that C4 sales did not meet our expectations and hence the reason to write down the remaining inventory.

While there is always some obsolete inventory in this business, we do not see a repetition in 2003 of anything like what happened in 2002 with ERC2 and C4 inventories due to the nature of our current driver line.

We were able to generate a $140 million in cash from operations in 2002.

We used some of that cash to buy back $46 million of our outstanding shares and to acquire our golf ball equipment that had previously been leased.

With the buy out of our ball equipment lease, we again find ourselves with essentially no debt and no off balance sheet financing.

We controlled our costs with continued implementation of six Sigma projects and reduced our corporate head count to offset the tough economic conditions we have been facing.

These actions have provided funds to invest in pro tour endorsements and other marketing and advertising activities as we fight to defend our share in a flat market while maintaining profitability levels that lead the industry.

In today's business environment, where confidence in their corporations and their management is at an all time low, we take pride in knowing that we run Callaway Golf with integrity and are open and honest with our communications with investors, even when the news may not be positive.

There have been new rules in legislation trying to address these issues, and I'm pleased to say that most of them have little impact on us.

We have added to our Web site, a discussion of corporate governance at Callaway Golf and welcome all of you to visit that Web site to see what we are doing.

I will turn the call over to Brad who will cover some details of our results and after he finishes, I'll come back to discuss future expectations for our company.

As Ron mentioned, there have been a couple of unusual items over the last two years that have resulted in some complexity in our financial reporting.

We have done our best to clearly articulate these items and most of you have followed what we have been saying and reported on as accurately.

Unfortunately, some have not.

For example, following our recent announcement of the filing of our 10-Q for the third quarter and reiteration of our full year guidance for 2002, some inaccurate and irresponsible reporting came out stating that we had purchased defective golf ball equipment from our customers.

Based on what we have seen, we believe this false report caused our shareholders to lose nearly $90 million in market value on that particular day.

Both Ron and I are frustrated with this negligent reporting but also recognize that we can do nothing about it beyond what we are already doing in terms of providing all of you with as much information as possible.

So if you'll bear with me for a few minutes, I will address the key items that seem to be of interest to everyone and hopefully put them to rest.

First, our long-term energy contract signed in 2001 resulted in some complex accounting including a non-cash charge that is currently on our balance sheet at $19.9 million.

We estimate that this solution to the risks that we face due to the California energy crisis has saved us on average about a million dollars per year in 2001 and 2002 and provided us with the opportunity to continue to purchase energy in bulk directly from our producers, resulting in ongoing savings of this magnitude.

Some may criticize the accounting complexity, but the fact is that our company has benefited directly and significant cost savings as a result of taking action to resolve an anticipated crisis that became a reality.

Moreover, we fully expect that this charge will be reversed at some point in the future.

If faced with a similar situation, we would again develop an action plan to protect the interests of all of our shareholders.

Second, a review of our warranty reserves was initiated by management, not our auditors, and resulted in a non-cash, pre-tax reduction in those reserves of $17 million.

This reserve reduction is the result of actions taken over several years to reduce the company warranty exposure both in product design improvements and quick action to resolve a problem when one did arise.

We also improved our processes to collect product failure data and once we had enough data to develop reliable product failure curves, we were then able to better estimate the reserve balance.

We were unable to reach agreement with our previous auditors as to whether this was a third quarter event or should be restated to prior periods.

Despite weeks of discussions and the direct involvement of our audit committee, which consists entirely of independent directors, we were still unable to resolve the issue, and the decision was made to bring in a new and fresh perspectives.

Accordingly, we retained Deloitte and Touche as our new auditors.

After their thorough analysis we were able to resolve the warrantee issue and complete our filings with the SEC.

Significantly, there was never any dispute with our past auditors or our current auditors about the amount of the adjustment.

Again, whatever might be said about the complexity of the accounting, the facts are we have improved on our products of failure rates and established our ongoing reserve balance based on this new information.

Third, our 10-Q for the quarter ended September 30, 2002 was not filed until January for the reason I just mentioned.

Because of the delay in filing, some charges that normally would have been taken in the fourth quarter were required to be reported in the third quarter.

The net result was that the numbers reported in the 10-Q are different from the numbers reported by us on October 17, 2002, by $0.08 per share.

This is merely a timing issue effecting both the third and fourth quarters.

For example, after our third quarter ended and our earnings release in mid October, we were notified of a customs and duties assessment in Korea.

Because we had not yet filed our 10-Q, accounting rules require we include this adjustment in our results filed with the SEC even though this event occurred in the fourth quarter.

Those who are seizing upon the numbers in the delayed 10-Q to assert that we had a loss in the third quarter for the first time are, in our view, playing fast and loose with the facts.

On an apple-to-apples basis, the third quarter of 2002 was not out of line with previous third quarters.

We have tried very hard to provide you with the detail needed to fully evaluate accurate quarter-to-quarter comparisons.

But this situation is not a problem or an issue.

Again, despite the complexity introduced into our reporting as a result of the late filing of our third quarter 10-Q, we think it was prudent to get the time - to take the time to fully explore the warrantee reserve issue with our auditors and the SEC staff to get things right, and the final results were positive for the company.

Fourth, we found ourselves in a situation where, for a number of reasons, we were in technical default of certain covenants in the company's current line of credit.

This technical violation was driven by a combination of the purchase of our Lease (ph) golf ball equipment and the shifting of the fourth quarter expenses into the third quarter that I just discussed.

Despite some reports that either misunderstood or tried to sensationalize this event, the facts are that we have not used this credit line for over three years.

We ended both Q3 and Q4 with over $100 million in cash, and had no plans to borrow against the credit line.

In our opinion, being in technical default of the covenant for a short period of time was a nonevent that we tried to explain to you.

Some have asked why we did not obtain a waiver.

The simple answer is that any waiver would require additional expense and before we incur this expense, we would like to evaluate other options that might make more sense and align better with our needs.

Again, we think you would all agree we did the right thing.

In fact, most of you have already said as much in your reports.

Finally, we have adjusted our obsolescence reserves in light of C-4 and ERC-2 inventories.

We have increased these reserves because they reflect our most current inventory analysis and are the right things to do in running our business and we will continue to look for every appropriate way in which to tighten our operations and improve our performance going forward.

In particular, we have told you on several occasions that we will do what it takes to eliminate our losses in the golf ball business by 2004.

As soon as our plans that permit us to accomplish this goal are finalized, we will communicate them to you.

So, we think any objective observer will quickly conclude that our financials while sometimes complex, show nothing more than a management team working hard to do the right thing for its business in a very tough marketplace.

We will continue to make the right decisions for the business and where this results in accounting issues that might make it more difficult to understand what we are doing, we will also continue to provide you with detailed information to help clarify and better understand how it affects our results.

I don't think our shareholders want us to do anything differently.

Let me now review our 2002 results.

Full year sales were $792 million, a decline of three percent.

While fourth quarter sales increased 16 percent to $123 million.

In constant dollars, there was no significant impact on full year sales, but fourth quarter sales would have increased by 14 percent instead of the 16 percent.

For the full year, sales of woods were 39 percent of total sales at $310 million, compared to 393 million last year.

In both real and constant dollars, wood sales decreased by 21 percent year over year.

Wood sales increased 57 percent in the fourth quarter versus last year, due to the introduction of the Great Big Bertha Two driver.

For the full year, however, despite this new product introduction our disappointment with C4 and the confusion caused by the United States Golf Association's reversal of their position allowing, excuse me, high COR drivers resulted in us not being able to match last year's combined sales of our Hawk Eye VFT and ERC2 drivers.

Sales of irons were $244 million during the year, versus $249 million in 2001, a decline of two percent.

Iron sales represent 31 percent of the total sales mix during 2002.

There was no constant dollar impact.

Sales of golf balls increased 20 percent to $66 million for the year.

Driving much of this growth was the introduction of new models, including our HX line as well as the fall introduction of our lower priced Warburg (ph) ball.

As you will recall, we reduced our pricing across all products in August by about 15 percent, which in part has resulted in market share gains every month since then.

As a matter of fact, if you look at U.S. market share on golf balls selling for greater than $20, we have achieved a clear number two position with an 11 percent unit share.

A gain of more than three points over the past year.

Sales of putters, accessories and other products increased 45 percent to $173 million for the year.

Growth in Odyssey putters led by the 2-Ball putter accounted for a majority of this growth.

We also achieved strong growth in accessories partly driven by our glove line, which we introduced in 2002.

We also experienced a solid first year with our Callaway Golf apparel licensing agreement with Ashworth , nearly doubling the first year expectations.

As we said before, part of the year one execution plan was to reinvest the associated license fees into marketing and POP fixtures.

This partnership looks very promising for future periods.

Turning to our international business, sales for the year slipped five percent to $353 million and represented 45 percent of our business.

On a constant dollar basis, international net sales would have decreased by the same amount.

As Ron mentioned, we achieved record revenues in our Europe, Canada and South Pacific regions.

International sales for the fourth quarter were $59 million, an increase of 16 percent versus $51 million in the prior year.

In constant dollars, international sales increased 11 percent to $57 million for the quarter.

Sales trends by markets for the full year were as follows.

Europe increased 16 percent to $137 million.

In constant dollars, Europe increased 12 percent.

Japan posted a 21 percent decrease to $103 million.

In constant dollars, Japan decreased 18 percent.

Rest of Asia, including Korea, decreased nine percent to $58 million.

In constant dollars, rest of Asia decreased 11 percent.

United States sales were essentially flat at $439 million.

Moving to the rest of the income statement, the numbers I will review will be pro forma operating results excluding the affect of the third quarter reversal of the warranty reserve and last year's energy charge.

Full year gross profits decreased six percent to $382 million with margins at 48 percent compared to 50 percent last year.

Gross margins were down slightly less than one percent in clubs, driven by lower pricing on our VFT and ERC2 drivers that were near the end of their product cycle.

For the quarter, gross margins were 44 percent versus 39 percent last year.

Remember that the increase in inventory obsolesce reserve actually hit the third quarter due to the timing of the filing of the 10Q.

Selling, advertising and tour expenses increased six percent during the year to $200 million or 25 percent of net sales compared to 23 percent last year.

These increases were the result of higher tour expenses as we embarked on gaining back our driver position and establishing ourselves in the ball segment and depreciation associated with our store in store fixtures and custom fitting programs.

Fourth quarter selling and tour expenses increased 13 percent when compared to last year, due to an increase in tour expenses, severance costs associated with our recent reduction in force and higher depreciation expense.

General and administrative expenses for the year were $57 million or seven percent of net sales.

A 20 percent decrease when compared to last year.

This decrease was primarily the result of lower employee expenses and amortization of goodwill and intangible assets.

For the quarter, G&A expenses increased 19 percent to $16 million or 13 percent of net sales.

This increase was the result of severance costs associated with the reduction in force in November, an increase in audit fees associated with the hiring of a new auditing firm, and a credit that occurred in 2001 associated with the reduction in bad debt reserve.

R&D expenses during 2002 were $32 million or four percent of net sales, compared to $33 million and four percent of net sales last year.

A reduction of two percent.

This light decrease was due to lower depreciation and consulting expenses.

For the quarter, R&D expenses increased five percent versus last year, reflecting the severance expense I already noted in the other areas.

Operating income during 2002 was $93 million versus $113 million in 2001 and flipped to 12 percent of net sales due to the charges associated with the write down of inventories and larger losses in our golf ball business.

During the fourth quarter, the operating loss was $10 million compared to $15 million last year.

This improvement over last year was the result of higher net sales and the shifting of expenses to Q3 due to the timing of the filing of our 10Q.

Without these unusual events, the operating loss for the quarter would have been $20 million.

We realized other income during the year of two million dollars compared to six million dollars last year.

Remember, this excludes the $20 million pre-tax charge we took for our energy contract in 2001.

The change was due to lower royalty income received this year and less interest income due to lower interest rates.

Fiscal 2002 net income decreased 19 percent to $59 million and diluted earnings per share was 87 cents, higher than the guidance given in our mid-December update, but 15 percent less than the dollar two earned last year.

Remember these are pro forma numbers without the energy contract and warranty reserve adjustment taken out of their respective years.

Golf ball net sales for the full year increased 20 percent to $66 million compared to $55 million last year.

Gross profit margins were flat with last year, in the mid teens, and would have been in the high teens except for some charges associated with the purchase of the equipment from our lessor in the third quarter.

We expanded our golf ball product line by adding three additional models, or five additional skews in 2002.

These models include our HX 3-Piece and 2-Piece models, each available in two skews, and our new lower price point War Bird ball.

We made significant progress in expanding our distribution and with the reduction in pricing last fall have seen increases in market share each month.

Competition has been very aggressive in defending their market share, though, which has resulted in higher expenses in both tour and advertising and operating losses for 2002 of $26 million versus a loss of $18 million last year.

As Ron mentioned, we are looking at all options surrounding our golf ball business with the commitment to eliminate the losses by 2004.

We ended the year with a strong balance sheet.

Cash and marketable securities were $108 million, an increase of 20 percent over last year.

We ended the year with virtually no debt and $260 million of net working capital.

DSOs for receivables were 62 days, consistent with the increase we've had all year, and due to our preferred retailer program that we discussed throughout the year.

Capital expenditures for the year and quarter were $74 million and three million respectively, with annual depreciation and amortization of $38 million.

Please recall that the annual number includes an additional $50 million for the purchase of our golf ball equipment.

So excluding that purchase, annual cap ex was $24 million, excuse me, was $24 million.

In 2003, we expect depreciation and amortization expense of approximately $45 million and cap ex of approximately $25 million.

During the fourth quarter we repurchased an additional 200 thousand shares of our common stock at an average price of $12.38.

For the year we have invested $46 million to repurchase a total of two point eight million shares at an average cost of $16.40 per share.

This concludes my remarks.

I would now like to turn the call back over to Ron.

Thanks, Brad.

With regard to guidance for the current year, in mid-December, we said that net sales for the first quarter would be approximately $270 million and full year would be flat with 2002, plus or minus three percent, given the many factors that could influence our business.

We are still comfortable with that range at this time.

From an earnings perspective, we estimate fully diluted earnings per share for the first quarter to be around 54 cents with the full year at 88 cents.

In reviewing first call, consensus shows 2003 earnings per share at 98 cents.

Either the Street is second guessing our guidance or there maybe some confusion surrounding 2002 full-year reported earnings, which includes the $0.16 warrantee reserve adjustment.

I would just like to reiterate again, the $0.88 full-year number for 2003 I just mentioned, which compares to our 2002 operating results of $0.87 excluding the warrantee adjustment.

And I sure hope nobody reports this as adjusting our expectations.

We provided this guidance late last year and we are sticking with it.

Also, we have heard from some of our major shareholders that longer-term guidance on expectations would be appreciated.

Long-term guidance is always difficult and is particularly difficult in today's world economy and in today's golf business.

But let me try to address this as best I can.

I would tell you that based on the company's current strategic plan, we are targeting to achieve, on average, low single-digit annual revenue growth and low double-digit increases in fully diluted net earnings per share.

We are not forecasting top line growth in 2003 at this time, but we do expect to improve earnings slightly while funding additional programs to enhance our ability to deliver on our expectations for 2004 and beyond.

So, obviously the progress towards our longer-term goal is not a straight line, but a curve that shows more improvement in the later years.

These targets are averages and will vary year by year.

Key factors in achieving these goals will be the elimination of our launches in our golf ball business, the recapture of our historical share of driver sales at reasonable levels of profitability, and an improving Japanese economy.

I hope this helps as you model out future years.

That concludes our prepared remarks.

I would like to thank you for your participation in today's conference call and your continued interest in the company.

We will now open the call to questions.

At this time, I would like to remind everyone, in order to ask a question, please press '*' then the number '1' on your telephone keypad.

We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Carole Buyers with RBC Capital Markets.

Hi, good morning, gentlemen.

Hi, Carole.

Couple questions.

Just glad you provided detail on the annual numbers.

I was wondering for the fourth quarter, can you give us, though, just a loss in the ball business this quarter verses last year?

That's my first question, then I have - my other question's related specifically, can you give us the fourth quarter revenues by U.S., Japan, Europe, and other?

For the quarter?

Yes.

Just for the quarter.

A [Inaudible] for golf ball, Carole?

Quarterly sales rate .4 million and the loss - operating loss on that was 8.3 million.

8.3, OK.

Sales by region, you wanted all the regions?

Yes, just U.S., Japan, Europe, and other.

OK, U.S. was 63.1, Europe 19.1, Japan 22.2, and 18.1 in all other.

Great.

And then just kind of delving into the business.

When you look at the woods growth, obviously, good performance there.

Seems like retailer is the acceptance there is pretty strong.

Would you say that the top position of the wood's revenues are primarily skewed towards the GBD II, and can you give us kind of a range?

Well, in the fourth quarter, Carole, the revenue improvement was driven by GBD II, but we are not prepared to discuss individual product line performance.

OK.

And as we look at this year, I mean, a popular product could help.

I mean a popular wood, obviously can help things greatly.

So in the initial growth that we are seeing in the wood's business is really - you know, at retail, and then with the retailers, and it seems like the market share gains are there.

Can you kind of give us a best-case - worst-case scenario of the GBD II this year?

Then as you look at the possibility of, you know, kind of gaining back your share in woods.

Well, Carole, I wouldn't begin to guess at a best case, worse case.

I would tell you that we really like our driver position.

The Great Big Bertha Two has hit the market.

It's a conforming driver.

You know, in this marketplace and in prior years we were tainted with the ERC2 and the C4 was a very unusual product.

So we feel comfortable that we've got a mainstream product that is an excellent performing product.

It - as you well know, it did extremely well last year as we brought it out on tour and we had significant built up demand at retail when we finally let it go to retail.

It still is being seated in the market place at this time.

Early to tell what will happen and it will take, I think, a few months before we get an indication on it.

But we like where we are with the GBB2.

Great.

Yes.

The retailers are giving us very good feedback on it.

And then finally and I'll open it up, I was wondering - do you know when - can you give a sense as to when we'll hear resolution on the ball business?

Well, it's ...

I mean, you say you're close.

Is it, you know, quarter?

Is it two quarters away?

No.

It - obviously it's a complex situation and it is probably the most serious decision we've had to make in the last three or four years in this business and so we are spending all the time required to do it properly.

I'm not prepared now to tell you when we'll make that announcement, but I will tell you that we have made a commitment that we will get ourselves into a position to eliminate the losses in 2004.

And so obviously we will need some time to implement the action plans to make that happen.

So, you know, guessing on what those action plans are sometimes not to distant future we'll be prepared to talk about it in detail.

Great.

And good luck this year.

Thanks.

Thanks Carole.

Thank you.

Your next question comes from the line of Michael Zinnman (ph) with SAC Capital.

Hi guys.

Hi Michael (ph) .

Hi Michael (ph) .

Was just wondering if you could clarify the guidance for 2003 of 88 cents and correct me if I'm wrong, but does the guidance not include any resolution from the ball business, any new product launch, anything for share buy back, anything in terms of a benefit for direct in the Euro?

Michael (ph) , you have done a great job of summarizing it.

The 2003 guidance does not include any effect of decisions we would make on the golf ball business.

It does not include any effect of share repurchase.

And we stated last time, Michael (ph) , that it also does not include anything in there for any kind of a similar product launch like we did for GBB2 this year.

And we aren't prepared to even talk about any additional new products at this time.

OK.

And anything from the Euro?

From the Euro?

Meaning, does the numbers assume that the Euro is going to be where it is today or have you made some assumptions for the Euro?

Yes.

We've made some assumptions.

I think we've got it built in just slightly stronger, but about the same as last year is our assumption right now.

Right.

OK.

And can you just remind me what currency - how much it helped in the fourth quarter?

Minimal.

Minimal in fourth quarter.

Year over year?

Right.

It was pretty minimal.

I don't have it front of me, Michael (ph) .

OK.

Thanks guys.

Thank you.

Your next question comes from the line of Casey Alexander with Gilford Securities.

Hey Casey.

Hi.

Good afternoon.

Can you hear me all right?

OK.

OK.

What my first question, Michael (ph) sort of jumped the gun there, which is, you know, I happen to bring my number down to 99 cents yesterday.

I mean, why would you be surprised that we wouldn't at least build in something for share repurchases and new product introductions.

I mean, isn't it reasonable for us to assume that there's at least going to be some of that activity during the course of the year?

Well, we're - we are not, at this point in time, predicting anything.

OK.

I mean, you know, you can - you can make assumptions you care to make, based on your knowledge of the marketplace, but we're not, at this time, saying that the 88 cents will include any of that.

All right.

One other question.

Does the purchase of the golf ball equipment - I mean, if you make the decision that the correct answer is to sell the golf ball plant, does the purchase of the golf ball equipment make it easier to facilitate that transaction?

Yes, it would.

OK.

That's all I have.

Thank you.

Thank you.

Your next question comes from the line of Joe Yurman with Bear Stearns.

Hey, guys.

Hey, Joe.

Two questions.

One on the Warbird (ph) .

Would it be correct to assume that the fact that we haven't seen this ball which you carefully didn't want to brand Callaway - that we haven't seen it in kind of the mass market discount channels - is that kind of coincident with the whole ball strategy that's still unresolved at this point or are they separate things and this could occur without that?

Well, I would say that it is part of the overall complexity of the golf ball issue.

OK.

All right.

So then that is, in fact, probably a reason why we're not seeing this ball in that distribution channel?

Well, you're making an assumption that we were prepared to bring that ball into channels other than where we're presently selling now.

And, you know, it was branded as Warbird (ph) to give us a lot of options.

We never made a decision that we would enter other channels.

Right.

That is an assumption I'm making.

You're right.

And my second question is just about commodity prices.

We're hearing from some of the manufacturers in just different industries and different businesses about that they're facing higher commodity prices this year.

Is that something that you guys are facing as well and how are you thinking about that in terms of your business this year?

No, competition for the golf business in components is still very fierce and we're not experiencing any wholesale increases in the - in component pricing.

All right.

Thanks, guys.

Thank you.

Your next question comes from the line of Bud Leedom with Wells Fargo Securities.

Good afternoon, guys.

Hi, Bud.

Just a couple of questions here.

Clearly, over the last couple of years we've seen a shift in sort of a big quarter for you guys from Q2 to Q1.

And I was just wondering, you know, in terms of what this means for reorders and summer selling season, is this sort of more competitively driven that you've seen this shift or is this something more underlying that we're seeing in the market?

And with that said, maybe, in terms of when you expect the big summer purchasing to hit, you know, when do you typically see that or at least here in 2003?

Well, Bud, I think the activity that you have seen in the last couple of years of us having larger sales in the first quarter and into the second quarter is a result of the efficiencies in our R&D process of being able to bring products earlier to market than the golf industry has historically done.

The golf industry historically would go to the show in Orlando at the end of January and show new products and then promise to deliver them in April.

And we've changed that dynamic dramatically and I think most of the competitors follow us now of introducing our products to our customers in the fall and delivering them at the beginning of the year, the new year products, as the warmer sunshine states open up for golf, Florida and Arizona, and so forth.

So I think that's more of a reflection on what's going on with the timing of when the revenues get recognized.

What that does is that does provide more opportunity for follow on sell through in those markets where we deliver product in the early months.

Obviously, half the country is under snow and it's below freezing, so they're not buying golf clubs at this point in time.

It's the sunshine states that are and when they get ready for reorder in the March, April timeframe is when we should start to see sell in to the other parts of the country and in Europe.

And then summer season will happen probably, you know, we'll see that happen May, June, July.

OK.

OK.

And then in terms of your assumptions that you've made for overall golf market growth in 2003, can you share those at least in terms of what you're planning to see overall in the market?

Are you talking the whole market, bud?

Yes.

Is it going to be a flattish year or some pick up or?

We don't see any sign that rounds played are going to improve.

In fact, we're - everything we read about the industry is that the cost of golf, of playing golf, the greens fees are a barrier to why rounds are not going up, in fact why they're decreasing.

So at this point in time we would not be predicting boldly that rounds are going to improve.

If anything, we think that it would be flat in the United States and that's really the only market where we get any tracking at all.

Right.

OK.

And then just finally sort of a long-ranging question now that you're put out sort of your expectations over the next few years.

I was just wondering technologically speaking, you know, of course metals have played a big part of the products that we've seen, you know, over the last decade or so and I was just wondering if you could sort of in a broad sense share what you might anticipate technologically speaking in some of the drivers.

Is it still going to be metals driven or sort of a combination of club weighting or are there some new materials that we may expect to see over the next couple of years.

Well, without giving too much insight to our competitors, I would tell you that we expect to lead the market with product innovation over the next few years, particularly in drivers.

Fair enough.

Thanks very much.

Thank you.

Your next question comes from the line of Josh Schwartz (ph) with Flatbush, Walter, Neill (ph) .

Hey, guys.

How are you?

Hey, Josh (ph) .

A voice from the past, how are you?

Good to speak to you guys.

I wanted to ask you questions about two issues, first you're talking about this ball business.

Frankly I'm getting, I'm a little nervous listening only because this is my question: it sounds now that you say - you've been saying this for a while, evertyhing's on the table.

You answered a question about, you know, it'd be easier to sell, I'm not going to say, you didn't, you know, you didn't say it's - you're going to sell it, but sounds like that is a possibility.

You're not denying that.

So my question is as directly as I can ask it is is this company going to sell - are there going to be Callaway branded golf balls being sold in the future?

I mean one way or the other?

I don't know the answer to that as honestly as I can tell you.

Right now, all options are on the table.

At the far extreme, and I hope it doesn't come to fruition, would be vacating the ball business.

OK.

So that - you are still thinking about that?

Yes.

OK.

Now, I guess related to this.

I guess it is a philosophical question, but you know, Ely Callaway always used to say that pros don't sell equipment.

And you know, if you look back to like 1997, you know, the company did actually more sales than it did this year.

Now, granted, you did it in more product lines, so I understand that it is higher costs to deliver the same sales, but you know, the question I have is, I am wondering - I think there is a structural change going on in your industry.

We have two - if you guys ended the ball business, you're the big - you know, you had all the greatest market share, and you went after the higher share guy in the ball business, so they are trying to come after you - or keep you out.

Nike's coming in and so I see - I am just concerned that - I don't believe, actually, that you are going to get a lot of return off of paying money to these pros in the form higher sales, and I am just curious, what - from your perspective, what you think is different now than two years ago, or three years ago, and why you are keeping that tour line so high?

Well, it's obviously not that simple an answer, but I would tell you that, first of all, if you've noticed what's been going on in the marketplace in the last few years, we have stayed out of the single high-profile, high-endorsement player marketplace.

We don't have any $5 million-a-year guy.

We don't have any $20 million-a-year guy.

That's not what we are about; however, we do believe that tour presence does validate the quality of the product and so we do have a tour presence.

We have stepped it up on drivers because we believe it makes a difference in drivers and we believe it makes a difference in golf balls.

And so in both of those areas, we have increased our tour presence.

But across the board of having a hundred full-staff tour endorsements, we've not gone that route.

As regard to 1997, a lot of things have changed in the last five years, and you are correct.

In 1997, when we had Great Big Bertha and Biggest Big Bertha in the marketplace, we were way out in front of everybody else.

Our competition has done a good job with product they've brought lately.

In fact, in some cases, copying our old technology.

That's why we're out in front, continued our - invest in R&D, because we believe new technology and better products will drive the market, and we intend to do that going forward, and that is why we're strategically saying that we are going to be able to grow the business particularly in our driver and metal wood segment.

OK.

I mean, I appreciate that.

I guess I would just say - I understand that.

I am just wondering, you know, you guys clearly - in my view, you are really in the market.

I just think - at least with the USGA right now, you know, with what they did.

I caps your - and people's willingness to listen to them.

That's more the thing.

It really puts a limit on innovation, in my view.

At least, innovation that is demonstratively superior to the customer, and so I wonder then - I guess what I am wondering is, don't you think that you could have maybe a little bit less sales and still have, you know, on the same number of shares in 1996, the company delivered $1.75 in earnings.

And I got to believe there is some mix where we could go back to a higher EPS and thus higher value to the owners of the company as opposed to the guys on tour and the retail shop.

Well, Josh, you and I know one another pretty well, so it's OK if I disagree with some of your points, isn't it?

Yes, no, absolutely.

OK.

And I'm just trying to be educated, frankly.

No.

I understand.

First of all in 1997 we weren't in the golf ball business.

We weren't losing $28 million year operating income trying to fight our way into that market.

Now, we've committed to get rid of that $28 million loss.

That's going to be huge for us, bringing that back in line.

Secondly, I would tell you that the only effect the USGA has had on us in terms of innovation is they've slowed us down a little bit because we were focused on high COR and distance.

And we believe we can engineer around them.

And so you're just going to have to trust us and see where we go down the road.

OK.

I'll leave it at that and I appreciate you're answering the questions and, you know, to talk to you again.

Thank you.

See you Josh (ph) .

Thank you.

Your next question comes from the line of Alexander Paris with Barrington Research.

Good afternoon.

Hey Alexander.

I was just - one of my questions was going to be on the ball.

The first - the full year loss, but I guess you just answered it.

Twenty eight million dollars?

Right.

In 2002.

Isn't that roughly the same as previously?

Hey Al, it was 26 million.

Oh, 26?

OK.

Yes.

Now that you've been in the ball business for a couple of years, and I guess it can be a profitable business if you get the economies of scale.

Do you have an idea of a - or what volume level would create the margins and the profits that would make an attractive industry segment for you?

That's part of our study, Alexander, and when we come out with that we'll be able to share what break even level is.

OK.

The - your press release on the PGA exchange, is that essentially what in the bubble years we were calling a B-to-B exchange?

No.

I think the PGA exchange is really more of a amalgamation of PGA professionals, giving them opportunities to buy products from a group of suppliers.

More in an organized fashion.

Sort of a buying group.

OK.

But I guess that's what B-to-B was supposed to be.

If you call them a business essentially collectively.

But is there an investment on your part to get in it?

Are you a partner in the exchange or how does it work?

We are a partner with the PGA of America and as part of that partnership we have access to the PGA exchange.

OK.

The other majors are in the exchange too?

Some are.

OK.

And how do you generate revenues from that?

Are there actual - is like it's a partnership or exchange and there's the exchange gets a part of your sales as a fee?

Or how does it work money wise?

No.

We still sell direct to individual PGA professionals, but being part of the exchange ensures that they get access to us.

Are you there Alex?

Yes I am.

So it's primarily information exchange?

Yes.

Oh.

OK.

All right.

The C4 and the ERC2 inventories, are they all gone now?

They are fully reserved.

OK.

All right.

So you're still trying to sell them but you've got them covered.

Yes.

And could you just make a comment on that lawsuit that involves the two-ball putter?

Did you acquire a design from them or ...

No.

We don't comment on litigation.

OK.

All right, then one other question.

Do you see any change in your tax rate for 2003?

It might be just slightly lower.

Maybe a quarter or to a half a point, in that range.

Probably a quarter of a point.

All right, thank you

Thank you, your next question comes from the line of Brett Jordan with Advest.

Good afternoon.

A couple quick question.

One is, the end of last year, I guess you were expecting to reclassify 6.4 million from the cash flow hedges into earnings in '02.

Is there any corresponding amount that you expect to reclassify in '03?

I don't know if I have that at my fingertips, to be quite honest with you.

Do you have another question?

We're looking it up.

I guess, target DSOs, your 62 days.

Are you seeing enough traction out of the preferred retail partnerships that you would extend that, or do you have a target for DSOs?

Well, we don't anticipate the DSO to go up year over year.

The program is essentially the same, maybe fine-tuned a little bit from this year.

And I would tell you that the response has been, from our retailers, favorable in that we are getting prime position and we've been able to get slightly higher inventories, and there's a higher level of education that's going on with our retailers with regards to their salespeople.

So we think the program works and wouldn't expect to see a big increase year over year.

What are you seeing at the retail level?

Are you seeing fewer points of sale as the contraction in the golf industry and the sort of less attractive pricing environment.

Are some of the retailers being taken out?

Not to the extent that you might anticipate.

Thanks.

I guess if you've got information on that cash flow.

Yes, it was $1.4 million loss for the full year.

OK, great.

Thank you.

Yes, you're welcome.

Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for question and answers.

Mr. Drapeau, are there any closing remarks?

Yes, thank you.

I just would like to thank everyone again for participating in the conference call.

The questions were great and I look forward to first quarter results when we can again discuss our business with you.

Thanks.

This concludes today's Callaway Golf fourth quarter fiscal year 2002 results conference call.

You may now disconnect.